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The decision to file bankruptcy should be considered carefully, as it will be captured on your credit report and will negatively impact your credit rating, potentially making it more difficult to get credit, insurance, employment, etc. It will also potentially increase the cost of credit or insurance. According to FICO research findings, the posting of bankruptcy information on a credit report can drop your credit score by 150 points or more.
In addition to negative impacts on your credit, there are also costs to think about if you are considering bankruptcy, as there are court filing fees and lawyer fees that can add up to several thousand dollars.
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It’s also important to understand that there are several different kinds of bankruptcies, with Chapter 13 and Chapter 7 being the primary types of personal bankruptcy:
According to the FTC, both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs and debt collection activities. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.
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Bankruptcy reform rules passed in the 2000s also require that you must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. Also, before you file for Chapter 7 bankruptcy, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount (the amount varies by state).
As you can see, the bankruptcy process is fairly complicated and there are also state-level considerations you must take into account. If you’ve reached a point where you are considering bankruptcy, I recommend that you take the time to research your options and, if possible, seek legal assistance to help you make the most informed decision.
Also, regardless of what others may tell you, you should be fully aware that a bankruptcy will likely have a negative impact on your credit rating for a period of time.
[Related: The Credit Line: Bankruptcy and Your Credit]
Image: Michael Pereckas, via Flickr.com
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