When an illness or sudden job loss makes it difficult for you to pay your bills, you may be stressed, confused and unsure where you can turn. Collection agents are harassing you at home and at work, the past due letters are a daily occurrence and you feel there is nowhere to turn. Maybe someone has suggested bankruptcy. More than likely, you looked at them in horror, thinking that would be the worst possible thing you could do. The fact is, there is a silver lining to bankruptcy and it is not as bad as you think.
The Automatic Stay
No matter what type of bankruptcy you file, whether it is Chapter 7, which eliminates all your debts, or Chapter 13, which restructures your debts so you pay back a portion of what you owe, an automatic stay is issued immediately. This means that once a collector is notified you are filing bankruptcy, they cannot proceed with any further debt collection. It can stop foreclosure, repossession and wage garnishment. But most importantly, it stops harassment from debt collectors who are not even permitted to call you once your bankruptcy is filed.
You May Not Lose Your Property
Each state determines what property you own can be protected from seizure in a bankruptcy proceeding. There are also standard federal exemptions, but you must decide whether the federal or state exemptions are best for your situation as you cannot use both. The equity in your home, a vehicle you must use to get back and forth to work household furnishings and retirement funds are examples of common exemptions in most states. However, if you file Chapter 7 bankruptcy and discharge any amount owed on your car or home, you could lose them as part of the bankruptcy.
Elimination of Debt
If you do not own your home and have few possessions of value, Chapter 7 can eliminate all unsecured debt. Any debt that you did not secure with something you own, like a car or household goods, is considered unsecured debt. Credit card debt, medical bills, signature loans and payday loans are all considered unsecured debt which can be discharged through Chapter 7 bankruptcy.
If you own your home or other property of value, Chapter 13 may be the better option for you. Chapter 13 can prevent foreclosure or repossession by including any past due debt into a monthly payment that fits into your budget. If you have a steady income, this is often the best option as you do repay some of the debts you owe, but at a much lower payment than paying them separately.
Your Credit is Not Destroyed Forever
It is true that a bankruptcy will remain on your credit between seven and ten years and this could mean higher interest and insurance rates immediately after you file. However, not filing bankruptcy and allowing your accounts to go into collections will hurt your credit score as well. As your bankruptcy gets older and you manage your finances properly, you may find that your score actually improves.
Debts discharged will fall from your credit report over time which could help your score improve. Once your bankruptcy is discharged, begin taking steps to rebuild your credit. A secured credit card, one where a deposit is held against your balance, is a good way to start rebuilding credit. Develop a relationship with your local bank or credit union who can guide you in the best way to rebuild your credit after bankruptcy.
Bankruptcy is designed to be a fresh start after financial difficulties. Although it is true that bankruptcy will hurt your credit score, the peace of mind in knowing that you no longer have to face the collection agents and that you can move forward without debt may be worth the temporary inconvenience of a low credit score. Remember to work with someone like the Law Office of Barbara B. Braziel to help you get started on this journey.