Should I file bankruptcy?

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Declaring bankruptcy may be a path forward if your bills are piling up faster than you can pay them, or life events leave you without an income. You may be worried about the ramifications on your credit, and rightly so. Regardless of the type of bankruptcy you declare, it will likely have a considerably negative impact on your credit. Consider that consumer credit scores are generally intended to help lenders determine the likelihood that you’ll make a debt payment within 90 days. A bankruptcy tells lenders that not only did you go over 90 days, you weren’t ever able to pay the entirety of what you owed.

If you decide to declare bankruptcy, you may have several options to choose from. You should likely consult a credit counselor to understand the pros and cons of each. Two of the most common types of consumer bankruptcies are Chapter 7 and Chapter 13 bankruptcies. With a Chapter 13 bankruptcy, you will repay a portion of your debts with a repayment plan. A Chapter 7 could completely wipe out your unsecured debts. From a credit perspective, the primary difference between the type of bankruptcy you declare is how long it could take for the bankruptcy to get removed from your credit reports:

  • Bankruptcy filings, including Chapter 7 bankruptcies, must be removed from your credit reports 10 years after the filing date.
  • However, credit agencies generally remove a Chapter 13 bankruptcy filing seven years after the filing date if you complete the repayment plan or the debt is discharged. If you don’t complete the plan and the debt isn’t discharged, the Chapter 13 bankruptcy may remain for up to 10 years.

You’re likely dealing with a multitude of financial, and perhaps personal, problems immediately following a bankruptcy. You may want to start by focusing on those, and when you’ve got a little breathing room, you can start taking steps to improve your credit as well. Starting to rebuild your credit as soon as possible could help your credit recover from a bankruptcy more quickly. One of the most important things could be starting to add new on-time payments to your credit reports. To do so, you may need take out a loan or open a credit card that reports your payments to the credit bureaus.

While a bankruptcy could hurt your credit more than any other type of derogatory mark, know that you can recover. Even though the bankruptcy could stay on you report for up to 10 years, the impact can decrease over time and taking steps to build positive credit could speed up your recovery.

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