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Declaring Bankruptcy

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If you find that you have used all the strategies outlined here and nothing has helped, your last resort would be bankruptcy. Bankruptcy is a legal strategy wherein you declare that you are unable to meet your financial obligations and those obligations are waived (in part or in full) by the court. Bankruptcy should always be your last resort because it is terribly damaging to your credit. A bankruptcy will stay on your credit report for 7-10 years. It is the ultimate admission of financial failure and signals to your creditors that you are not a good credit risk. Basically, if you have declared bankruptcy, you will have a terribly hard time getting any credit or loans approved for years.

Some forms of bankruptcy are seen as being worse than others. There are two basic types of bankruptcy available to individual consumers: Chapters 7 and 13. Each chapter does something different:

  • Chapter 7 Bankruptcy is called liquidation and is the most radical bankruptcy available. By declaring Chapter 7, you are basically throwing in the towel. In the process of Chapter 7, you give all your non-exempt property to a trustee who sells it off for whatever value it will bring. The resulting funds are used to pay off some portion of your debt. Then all remaining debts are discharged (made to disappear) with some exceptions. Exceptions include child support, alimony, student loans and certain kinds of tax debts. You may be able to keep your home if it valued at $125,000 or less and you may be able to keep your car. State law, which varies state by state, determines what you can and cannot keep. Also, this type of bankruptcy will remain on your credit report for 10 years.
  • Chapter 13 Bankruptcy can be thought of as "bankruptcy lite". It is often called reorganization because it allows consumers time to reorganize their financial affairs and formalizes a repayment plan administered by the courts. Typically, you are allowed five years to make good on your debts. Under this chapter, you retain your property rights. A Chapter 13 bankruptcy will remain on your credit for 10 years.