A lot of people are hurting lately due to the credit crisis, some in which are now contemplating bankruptcy to get out of debt.  If you do chose to file for bankruptcy you have to consider whether you need to file for chapter 7 or chapter 13, and see how it effects your FICO score.  In my writing I'm not going to pretend that I have an easy answer for you, it's actually a very difficult decision that you need to talk to family and friends, and your lawyer, regarding how to proceed.  In the end, you must keep in mind that you are the sole person responsible for your decision.  Before you make your decision however, I do have several things that you should consider:

1.  Do you have a real plan?  You need to calculate how life will be before and after a bankruptcy.  Create a budget for both before and after, and see if bankruptcy has a significant positive effect on your budget.  You also have to see if your situation has really changed before you take out bankruptcy.  For example if you have constant health problems and continue to run to the emergency room without insurance, there is not much of a point taking out bankruptcy and still have that issue.  You also need to make sure that you can stick to your budget.  Bankruptcy will show up on your credit score for up to 10 years, and the surest way to increase your credit score afterward is to keep your debt as low as possible, and always pay your monthly bills on time. 

 

2.  Do I know the difference between chapter 7 and chapter 13?  Some people think that bankruptcy will simply wipe out debt.  The fact of the matter is that chapter 7 bankruptcy tends to wipe out all qualifying debts, while chapter 13 tends to be more of a payback program, that you can more afford than not taking out bankruptcy at all.  You need to know which chapter of bankruptcy that you first qualify for.  The U.S. Trustee Program Website has a means test to show you how you qualify.

3. Will this get rid of my necessary debts?  Debts such as student financial aid baked by the government do not get discharged in a bankruptcy.  Also, debts from taxes are also next to impossible to get discharged during a bankruptcy.  I've personally known one guy with $25,000 of debt, but finding out that $20,000 was government backed student loans he was trying to get out from under.  Unless he needed to really discharge $5,000, going into bankruptcy will only make his particular situation worse.  

4. Can I survive after taking the hit on my FICO Score?  The internet is filled with a lot of positive information regarding bankruptcy, talking about a clean slate, and getting a fresh start.  While this might be true regarding your debt, your credit score will take a hit the equivalent of dropping an A-Bomb on it.  You need to figure out what your credit score will be after bankruptcy, and how you will be able to manage.  One great tool I have found is the FICO Score Estimator, in which you can figure an approximation of how hard your credit will be hit.  

5.  What other aspects are affected by my bankruptcy?  There are other things that are effected by your bankruptcy beyond just your finances.  Employers are now looking at credit scores when considering a new hire, citing that employees with better credit scores tend to be more productive and more responsible.  Insurance companies are also looking at your credit score when bringing on new customers and figuring out insurance rates, since they find that people with better credit scores tend to be less risky for them to insure. 

6.  Have I looked at laws that involve the state that I will take out bankruptcy in?  There is a lot of differences between states as far bankruptcy, in particular for homeowners.  One example is how they deal with equity in your house.  Some states will allow you to keep the full amount of equity you have in your house, while other states will require you to give the courts all of it, and place a new mortgage on your house.  There are also states that vary greatly as far as the percentage of equity you are allowed to keep.  The best thing you can do is look up this information for your particular state, as well as anything else that can effect you. 

Bankruptcy is never an easy topic to cover, as it is a huge life change that has some significant positive and negative life changes.  If you are really struggling financially however, the best thing you can do is gather information on your situation and make an informed decision.  I can't say whether bankruptcy is the best decision for your situation, as every situation is different.

 

Other external links:

US Trustee Program/Department of Justice

United States Bankruptcy Courts

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