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If that stack of bills is quickly becoming too much to handle, you might find yourself considering bankruptcy. But before you decide whether this is the right option for you, it’s important to understand what bankruptcy can do to your credit score and how long you may see the bankruptcy on your credit report.
First, the basics: There are three different types of bankruptcies available to consumers: Chapter 7, Chapter 13, and Chapter 12.
Perhaps the most widely known type of bankruptcy is Chapter 7. According to Debt.org, Chapter 7 bankruptcy filings make up about 70 percent of non-business bankruptcy cases.
Chapter 7 is often known as “straight bankruptcy,” and it involves the sale of all assets (that aren’t deemed exempt) by a court-appointed official. Alternatively, those assets can be turned over to your creditors as repayment. Exempt assets can include cars, work-related tools, and basic household furnishings.
The Chapter 7 bankruptcy laws state that you are required to wait eight years after emerging from a Chapter 7 bankruptcy before becoming eligible to file another Chapter 7 bankruptcy. Before filing Chapter 7, you must satisfy a “means test” to confirm that your income does not exceed a certain amount that varies by state.
Debt.org states that Chapter 13 bankruptcy filings account for 30 percent of non-business bankruptcies. However, in 2005 Congress revamped bankruptcy laws to make Chapter 13 more appealing to consumers.
In a Chapter 13 bankruptcy—also called a “wage earner’s plan”—the court approves a repayment plan that lets you use future income to pay off all or part of your debts over a three to five year period instead of selling off your assets. Chapter 13 can even help stop foreclosure proceedings, provided you’re able to make all mortgage payments that come due during the life of the repayment plan.
A lesser-known consumer bankruptcy filing is a Chapter 12, which is designated for “family farmers” or “family fishermen” (terms that are defined in the Bankruptcy Code) with regular annual income. It helps these folks create and carry out a plan to repay all or part of their debts in installments over three to five years.
Should I file for bankruptcy?
While a bankruptcy filing helps organize debts and shelters you from aggressive creditors, it isn’t a cure-all for debt troubles. Bankruptcy doesn’t typically relieve you of alimony and child support or loans obtained through fraud. It also doesn’t protect you from debts that are incurred after bankruptcy is filed or, in some cases, debts that began in the six months prior to bankruptcy. Some student loans and taxes aren’t covered either.
If you do choose to file, you are required to get credit counseling from a government-approved organization within six months before you file for any chapter of bankruptcy. You can find a state-by-state list of approved counselors at www.usdoj.gov/ust.
You may also want to consider how long a bankruptcy stays on your credit file. Different chapters of bankruptcy stay with you for different lengths of time.
The public record of a bankruptcy will generally continue to appear on your credit report for 10 years after the filing date. The individual debts included in the bankruptcy, such as credit accounts, may fall off your credit report seven years and 180 days from the start of the delinquency. This means you may see individual accounts removed from your report before you see the record of the bankruptcy disappear.
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