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Bankruptcy

Should I File for Bankruptcy?

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Dear Experian,

I have multiple charged-off accounts and want to know if I should file bankruptcy or try to pay off the debt. I owe quite a bit.

- AER

Dear AER,

There is a lot to consider before deciding whether to file for bankruptcy, and it should always be the last-resort option. A bankruptcy is the greatest indicator of risk in a credit report, so it has the most serious and longest-lasting impact on your ability to obtain new credit.

What to Consider Before Filing Bankruptcy

There will be instances in which bankruptcy is the best, or only, option. If you are truly unable to repay your debts, filing for bankruptcy protection will stop collection efforts so you can begin to recover and get back on your feet. Some examples of when bankruptcy may be a necessary option:

  • When you are facing serious financial consequences due to divorce.
  • When your financial liabilities far exceed your current income and assets.
  • When you have exhausted all your other options, including credit counseling, payment accommodations with your lenders and other assistance.

Before making a decision, order copies of your credit reports from each of the three credit reporting agencies and make a list of all the debts you owe. You should also seek advice from a qualified credit counselor or financial advisor.

How Does Filing for Bankruptcy Affect Your Credit?

The two most common types of consumer bankruptcy are Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, you do not repay any of the debt owed. The bankruptcy listing remains on the credit report for 10 years from the date it is filed. Under Chapter 13 bankruptcy, you are responsible for paying back a portion of the debts that you owe through a debt repayment plan. A Chapter 13 bankruptcy is removed from your reports seven years from the date it is filed.

In both cases, having a bankruptcy in your credit history will seriously affect your ability to obtain credit for as long as it remains on your report. If you do qualify for credit while the bankruptcy is part of your credit history, you will likely have to pay higher interest and fees than you would otherwise. It can also affect your ability to qualify for things like an apartment, utilities and even employment. Even car insurance rates may be affected.

Aside from the impact on credit, filing for bankruptcy can come with other negative consequences, such as:

  • The cost: There will likely be court fees as well as bankruptcy attorney fees to pay when you file.
  • Loss of property: If you are unable to show the court you can continue making payments, you could lose property such as your home or your vehicle.
  • Bankruptcies are public records: As part of the public domain, they may be seen by others and affect personal and business financial decisions, even when a credit report is not accessed.

Alternatives to Bankruptcy

There are several alternatives to explore before considering bankruptcy:

  • Speak to a reputable financial advisor or credit counselor. A qualified expert will be able to provide an unbiased perspective that can help you through your decision-making process. They can even put you on a debt management plan, which can help you negotiate lower payments and more. With help from a counselor, and through careful budgeting, you may be able to repay the debts you owe over time.
  • Consolidate your debt. With debt consolidation, you'll roll all your debts into one new account, preferably with a lower interest rate. This can enable you to pay off your past-due amounts and make one monthly payment going forward. Having just one payment may make it easier to manage your existing debt, and could save you on interest as well.
  • Try to settle your debt. Debt settlement requires negotiating with your creditors to accept a smaller payment, reduce your interest rate or both in order to settle the debt. Debt settlement is considered negative because it means that you did not repay your debts as agreed. However, the impact from settling an account will probably not be as great or as long-lasting as declaring bankruptcy.
  • Borrow money from family. If you are lucky enough to have a family member who is willing and able, you may be able to avoid bankruptcy by borrowing just enough to make your debt payments manageable again. Be sure to have a plan to pay your family member back, or else you may compromise your relationship with them.
  • Restructure your mortgage. With both of the following options, be aware that failure to make mortgage payments may result in your home being foreclosed on.
    • Mortgage refinance: If your credit is good enough, refinancing your mortgage to a new low rate could get your monthly payment low enough that it saves you from bankruptcy.
    • Mortgage modification: If you are unable to refinance at a lower rate, you may be able to qualify for a mortgage modification, which could also lower your payments.

Filing for bankruptcy is a major decision, and one you will live with for years to come, so don't be afraid to ask for help when determining whether this is the best option for you.

Thanks for asking,
Jennifer White, Consumer Education Specialist

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