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If you're drowning in debt and can't see a light at the end of the tunnel, filing for bankruptcy may seem like a viable option. With a Chapter 13 bankruptcy, you reorganize your debts so they're easier to pay off. You'd then need to stick to an agreed payment plan, which would get creditors off your back. With a Chapter 7 bankruptcy, you liquidate your assets and a trustee uses the proceeds of their sale to repay creditors as much as possible, after which you get to start over with a clean slate debt-wise.
As of late September 2020, there were 420,048 bankruptcy declarations in the U.S., according to new research by The Ascent. If you're considering bankruptcy, be sure to read up on the consequences that could ensue. Here are three you should know about.
1. Credit history damage
A Chapter 13 bankruptcy will remain on your credit report for seven years following your filing, while a Chapter 7 will stay there for 10 years. Any type of bankruptcy is a sign you're not a trustworthy borrower. Following a filing, you may find it's difficult or even impossible to get a mortgage, auto loan, or even a credit card. A bankruptcy on your credit report could also cause you to get turned away when you apply to rent a home.
2. Losing assets
With a Chapter 7 bankruptcy filing, a trustee liquidates your assets to repay creditors. That means you risk losing assets that are essential or important to you, like jewelry or even a vehicle. Now the good news is that some of your assets will likely be exempt during the Chapter 7 process, but the specifics of what you're allowed to keep vary by state. You'll need to consult with an attorney to see what assets you risk losing if you opt for a Chapter 7 filing.
3. Spending a lot of money
The whole reason people file for bankruptcy is that they land in a cash crunch and can't keep up with their debt. But ironically, the bankruptcy process is expensive in its own right. For one thing, you'll need to pay a court filing fee just to get the process going. For a Chapter 7, the fee is $335. For a Chapter 13, it's $310. But that doesn't include legal fees. Remember, lawyers don't help clients file for bankruptcy out of the goodness of their hearts; they need to get paid. Some attorneys will charge a flat fee to oversee a bankruptcy filing, while others charge by the hour. Either way, you could wind up with a substantial tab to pay off.
The bankruptcy process can be a drawn-out, stressful ordeal while you're going through it, and it could have a lasting impact beyond that. Make sure you understand exactly what you're getting yourself into before you pursue a bankruptcy filing. There may be a better way to manage your debt, like entering into a settlement agreement with your creditors, so pursue your options before rushing into a Chapter 13 or 7 proceeding.