When the bills are piling up and you can’t see the light at the end of the tunnel bankruptcy can seem like the only option. While there is a certain amount of stigma attached, filing for bankruptcy can be a saving grace that scrubs your debts and helps you get back to zero. However, there are some factors to consider first.
The downsides to bankruptcy
While most people file for bankruptcy to get out from under crippling debt, there are some things that will stay with you, including:
- Some student loans
- Alimony and child support
- Divorce debts, such as property settlement debts.
- Debts for some penalties or fines, including debts for intentionally causing harm
- Debts incurred for drunk driving that lead to personal injury or death
When you file for bankruptcy your credit score will take a massive hit, you could lose over 100 points in one fell swoop. However, if you are already up to your ears in debts and struggling to make repayments, then each missed bill is chipping away at your credit score. While 100 point hit is nothing to sneeze at, compared with constantly missing payments it may balance out.
Bankruptcy is also expensive. You will need to get a lawyer to assist with all the related paperwork and appear in court. Filing for bankruptcy can cost $300-$500 and if you file a Chapter 7 discharge you also need to complete a credit counseling course within 6 months of your bankruptcy.
While you keep some of your debts, bankruptcy will erase credit card debts, personal loans, medical bills, utility bills, overdue rent, and a whole host of other debts, including their fees. Once these are taken care of it can be much easier to get back on your feet.
While your credit score takes a hit by filing for bankruptcy, having all those debts erased puts you in a stronger financial position. Without those looming debts, you can focus on those that weren’t resolved by bankruptcy, and start rebuilding your credit score using a secured credit card. Research shows that your credit score plunges before filing for bankruptcy, and within six months of finishing the paperwork credit scores climb by almost 100 points.
How to Get Started
Firstly, visit a financial counselor and an accountant. While filing for bankruptcy can destroy your debts, it will be recorded on your credit history for years to come. Bankruptcy isn’t a quick fix solution for everyone but is the last choice for when you’re in over your head and sinking deeper every day.
Weigh up all your other options like debt consolidation, and hustling for extra cash with a second job or a housemate. Building secondary income streams will not only benefit you to get out of debt but will supercharge your finances and protect you if your employer lets you go.
Finally, when you’ve tried out every other avenue, line up a lawyer to step you through the process. Over- or under-claiming on your bankruptcy paperwork can affect you in the long term, and while a lawyer may seem expensive, expert help with saving you thousands through the process and the years to come.