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Things You Need To Know Before Declaring Yourself Bankrupt

Posted on 10, Jun, 2013

Very few people ever imagine that at some stage in their future they'll have to declare bankruptcy, especially people who floated along in the cozy property bubble of the first 8 years or so of the new Millennium. Having to declare bankruptcy is one of the most embarrassing and humbling experiences anyone can go through, especially for people who would have been classed as being comfortably rich prior to this. Bankruptcy is one of those things that is now often out of people's control, but it's also something which people live in fear of because of the stigma attached to it.

So we're going to take a look at some of the things you need to be aware of before you declare bankruptcy.

Chapter 7 vs Chapter 13 Bankruptcy

If you file for Chapter 13 bankruptcy you will be protected from your creditors, which can prevent you losing your car and/or house. You then need to repay all your debts over a maximum period of 60 months, after which time you are then debt free, often for just cents on the dollar of what you originally owed. In Chapter 7 bankruptcy you eliminate some or all of your unsecured debt immediately and you can complete the bankruptcy process in as little as 3 or 4 months. It's critical that you understand that basic differences between each type of bankruptcy.

You Don't Lose Everything

Most people assume that declaring themselves bankrupt means losing everything they own, but in both Chapter 7 and Chapter 13 bankruptcy you can still usually keep your house and your car. In fact with Chapter 13 bankruptcy it's more about reorganizing your finances, rather than losing everything you own.

It Doesn't Remove All Types of Debt

For anyone struggling under a small mountain of student or tax debt you need to be aware that filing for bankruptcy won't necessarily eliminate those debts. In brief your tax debts can be loaded into your bankruptcy on rare occasions similar to student loans being written off. Just don't attend the initial bankruptcy meeting with your creditors and attorney under the assumption that all your debts are going to magically disappear.

Bankruptcy Does Affect Your Credit Score

One of the biggest fears people have about declaring bankruptcy is that it will affect their credit score for a number of years. Firstly this is true - declaring yourself bankrupt will negatively affect your credit score but it was your abuse of credit cards and other forms of credit which got you in trouble in the first place. Your credit score was already just a pale shadow of its former self before you filed for Chapter 7 or Chapter 13, but with a few months of hard work repaying your debt, your credit score can recover far more quickly than you might have imagined possible.

Having to declare yourself bankrupt is far from ideal but the other option is to simply keep trying to service a mountain of debt which gets larger every single day. At least by working with a bankruptcy attorney and your accountants you can create a plan which allows you to be free of all your debts in as little as 4 months and no more than 60 months.

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