Is bankruptcy an option?

05.12.09
By John Ulzheimer

Bankruptcy is a perfectly legal and recognized method of getting out of debt. In fact, between 1.2 and 1.5 million people file for protection under the bankruptcy laws each year. And while none of us wants to file for bankruptcy, you should keep it on the table as one of your options, especially if you’ve found yourself in the type of unsecured or otherwise delinquent debt that is crushing so many of us these days.

Bankruptcy has long had the reputation of being an option reserved for irresponsible debtors. This is not the case, however – not even by a long shot. The statistics are all over the place (which is why I won’t cite them here), but it’s safe to conclude that the vast majority of filings are the result of lost jobs, failed businesses, divorces, medical expenses, death of a money-earning family member, or some sort of combination of the aforementioned. And yes, there’s the occasional case of irresponsibility.  

The problem with filing for bankruptcy is that it’s expensive. It’s not so expensive in terms of the filing process (although that isn’t cheap either), but rather because of the long-term costs, the most expensive of which are your credit reputation, your credit scores, and any financing you choose to take over the next several years.

There are two types of bankruptcy that consumers can file:

Chapter 13 Bankruptcy – This is also referred to as a wage earner plan. The consumer pays into a trustee who then redistributes the money to creditors. A consumer who makes too much money will likely be forced to file a chapter 13. This type of bankruptcy normally takes between three and five years to complete or “discharge.” It remains on your credit report for seven years from the date it discharges, but not longer than ten years total. As such, the vast majority of chapter 13 bankruptcies remain on your credit files for ten years.

Chapter 7 Bankruptcy – This is also referred to as a straight bankruptcy. A consumer may actually walk out of the courtroom completely debt free under a chapter 7. A chapter 7 remains on file for ten years from the date discharged. Consumers who have modest or limited incomes will likely qualify for a chapter 7.

Both types result in serious and long-term damage to your credit files and credit scores. And while the credit repair sect would like you to believe that you can achieve competitive financing very soon after filing for bankruptcy, the reality is very different. Because of this, bankruptcy should always be your last option, although it’s probably not always your worst option.

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Bankruptcy should always be your last option, although it's probably not always your worst option.