Many Chapter 7 filers don't own any nonexempt property, so you might not have to give up anything. A Chapter 13 bankruptcy reorganizes your debt. You must develop a plan to repay your creditors over three to five years.
Most plans will include provisions that allow you to pay creditors less than the amount owed. You get protection from creditors. When you file for bankruptcy, you get the protection of the automatic stay. The stay prohibits most creditors and collectors from engaging in collection activity against you. The automatic stay has the power to stop harassing phone calls, lawsuits, garnishments , repossessions, and foreclosures. You get a fresh start. Through a Chapter 7 bankruptcy case, you may eliminate most unsecured debt , such as medical bills and credit card debt.
You may also surrender real estate or vehicles that you've financed if you don't want to keep those debts. With a Chapter 13 bankruptcy case, you repay a portion of your unsecured debts through the court-supervised repayment plan.
And depending on your situation, you might be able to pay for your vehicle at a reduced rate. You can also save your home from foreclosure and your vehicle from repossession. You give up some privacy. Your employer might learn about your bankruptcy case if you permit it to pull your credit reports or if your Chapter 13 plan payments are made through payroll deductions. Again, bankruptcy records are available at the federal bankruptcy courthouse where they're filed and through the federal court system's subscription-only PACER service.
But as a practical matter, your family and friends are unlikely to find out you've filed bankruptcy unless you owe them money. You might have to make some sacrifices.
You might have to make some sacrifices to qualify for bankruptcy, such as surrendering nonessential or luxury possessions. Also, if you file a Chapter 13 bankruptcy case, you'll be on a strict budget for three to five years, and you can't get credit during that time without the court's permission. Although a debt consolidation loan will likely show up on your credit reports , as long as you stay current on the debt, it won't typically lower your credit scores much, if at all, under most scoring models.
But when you seek new credit in the future, these loans especially if they're from finance companies or similar businesses could be viewed negatively by creditors who see them in your credit files because they might imply prior debt problems.
A bankruptcy filing, on the other hand, definitely hurts your credit scores. The damage it will do depends, in large part, on how good your credit was before you file. If you're delinquent on many accounts before you file, your credit will already be already bad.
If you then file for bankruptcy, your score will take a dip but not as bad as if your credit was good before filing for bankruptcy. If you file for bankruptcy when your credit is good, your score will take a much bigger hit post-filing.
Depending on the type of bankruptcy case you file, the filing may stay on your credit reports for seven to ten years. But filing for bankruptcy might actually help your credit , too, like by improving your debt-to-credit ratio, getting rid of delinquent accounts, and giving you a chance to start rebuilding your credit.
Consider the following questions when deciding whether loan consolidation or bankruptcy is in your best interest. Consolidating your debts won't eliminate any of the amounts you owe. Even if the consolidation loan reduces what you pay monthly, you still have to pay off the total amount of the debt. So, if you don't have a steady income or can't afford the new monthly payment on a consolidation loan, consolidating your debts probably won't help you get back on track.
One of the main benefits of consolidating your debts is getting a reduced interest rate. Reducing your interest rate allows you to lower your monthly payment and pay less interest over the long term. But if you can't lower your interest rate with a consolidation loan, or if the term is extended so that you'll be repaying the debt for a longer time see below , then it's probably not worth the extra cost and fees you'll incur consolidating.
Even if you get a lower interest rate, don't assume that your payment went down solely for that reason. If your new monthly obligation is substantially lower, it usually means a longer repayment term. And if you extend your repayment term, it will probably take you significantly longer to pay off your debt. While it could be nice to have a more manageable monthly payment, you'll most likely pay more interest over the life of the loan.
If you're already behind on debt payments or have accounts in collection , bankruptcy might be able to help get you back on your feet sooner than debt consolidation. Bankruptcy gets rid of many types of debts and provides you with a fresh financial start. When you reduce your debt load and get your finances under control, you can start making loan and credit payments on time, reduce your debt-to-income ratio, and take other steps to rebuild your credit. So long as you have income that you aren't putting towards your basic monthly expenses, you probably have other options for getting out of debt trouble, including:.
If you need help deciding which route to take, consider talking to a nonprofit credit counseling agency. Credit counseling agencies offer financial assistance, including debt management plans and debt consolidation advice, for free or at a minimal charge.
These agencies also provide credit counseling, budgeting guidance, and debt management advice at no or low cost. Some debt consolidation loans are used to pay off both student loans and other unsecured debt such as a credit card.
In that case, depending on your circumstances, you may be allowed to discharge the loan. If you took out a debt consolidation loan in bad faith—with no intention of repaying it—you could be denied a bankruptcy discharge. For example, the bankruptcy court might decide your actions are in bad faith if you file bankruptcy only a few months after taking out the loan.
There are huge differences between bankruptcy and debt consolidation services. If you are using a debt consolidation service, you are going to wind up paying back to creditors. However, in my experience, I have seen too many cases where somebody has been in debt consolidation only to wind up filing for chapter 13 or chapter 7 bankruptcy after they have given away thousands of dollars to a debt consolidation company.
Creditors have to agree to be part of the program or they can opt out. With chapter 13 bankruptcy, the creditors must be part of the program or they are in eliminated. So there is a huge difference between debt consolidation and chapter Another great thing about chapter 13 as opposed to debt consolidation is chapter 13 bankruptcy is administered by the court under the supervision of the federal court.
What that means is you are going to have protection, that your creditors are prohibited from contacting you and prohibited from taking any type of collection actions against you once a case is filed. Further, the bankruptcy code dictates how much your creditors are going to receive over the next 3 to 5 years pursuant to a proposed plan to repay your debt.
Plus, chapter 13 is the best way to consolidate your debt and the best way to protect yourself from creditor harassment and creditor collection efforts.
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