Before filing for bankruptcy, make sure you are getting enough debt relief to justify the black mark on your credit report.
Bankruptcy brings many benefits to individuals facing overwhelming debt. However, it does have one major drawback, namely a significant and long-lasting black mark on your credit score. A Chapter 7 bankruptcy will remain on your credit report for 10 years, while a Chapter 13 bankruptcy will remain for 7 years. So is filing for bankruptcy really worth it? The answer will be different for each individual and depends on your current credit score, the amount of debt relief you can achieve, and your ability to rebuild credit after bankruptcy.
Your Current Credit Score
In most cases, individuals have already missed payments or even defaulted on certain debt accounts by the time they get to the point where they want to consider bankruptcy. In this case the credit score may be pretty dismal already and filing for bankruptcy won’t make matters that much worse. However, in other cases individuals may still have good credit because although debt payments make up a significant portion of their income, they have been diligent about always making their payments. In this case, experts generally recommend filing for bankruptcy and taking the blow to the credit score if this would allow for faster debt repayment. A typical guideline is if you will not be able to pay off your debts on your own in 5 years, filing for bankruptcy would be better than toughing it out.
Amount of Debt Relief
Another important consideration is the amount of debt relief you can expect to achieve. This will depend on the kinds of debts you have as well as the type of bankruptcy you may qualify for. Chapter 7 bankruptcy is a quick process that allows for the full discharge of all unsecured debts like credit card debts, medical bills, etc. However it does have an income limit making it unavailable to many individuals. Chapter 13 allows for the creation of a consolidated repayment plan lasting 3 to 5 years, at the end of which the remaining amount of certain debts may be discharged. Generally speaking, you want to ensure you are gaining significant debt relief before you sacrifice your credit score to bankruptcy. A bankruptcy attorney can help you understand just how much relief you can expect to find.
Recovering from Bankruptcy
One final consideration that will help determine if bankruptcy is worth the damage to your credit score is how quickly you expect to be able to recover financially after bankruptcy. If you have a good job, you can begin rebuilding your credit immediately following your bankruptcy by getting a new credit card and paying it off in full each month. In many cases, individuals have been able to rebuild their credit so quickly after a bankruptcy that they have qualified for a home loan just two years later.
