Bankruptcy: A term we often hear and immediately picture a film scene where the moving van shows up and begins confiscating all of a person’s assets. But what does it actually mean? How does it affect your credit score/credit reports? And what does it mean for your future finances? At ORNL Federal Credit Union, we believe it is important to be financially educated in all aspects of banking. So, let’s take a deeper dive into bankruptcy.
Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
When one decides to proceed with filing for bankruptcy, it is a serious matter that has been well thought out. Bankruptcy is a legal process designed to help people eliminate debt or repay portions of what they owe. To file for bankruptcy, you must be able to prove that you cannot repay your debts along with completing credit counseling through a government-approved credit counselor. After the counselor has gone through every possible option, the last step should be to file bankruptcy.
Chapter 7 bankruptcy is what most people think of when they hear the term “bankruptcy”. Under this type, a federal court trustee supervises the sale of any assets that are not exempt. The money from the sale is then used to pay off the debt owed to the creditors. With this type of bankruptcy, you are still not exempt from paying court-ordered alimony, child support, taxes, or student loans. The negative impact of chapter 7 bankruptcy is very significant; you will likely lose property and the bankruptcy information will remain on your credit report for ten years after the filing date. The biggest take away: Should you acquire more debt in the future, you are not able to file bankruptcy under this chapter again for another eight years.
Chapter 13 bankruptcy works differently. With this type of bankruptcy, one is still able to keep their property in exchange for partially or completely repaying the debt. There will be a negotiation to determine the length of the payment plan. Once you have completed the repayment plan, your debt is discharged. The biggest take away: A chapter 13 bankruptcy will roll off your credit report after seven years and you are allowed to file again under this chapter in as little as two years.
The Aftermath of Filing for Bankruptcy
Bankruptcies leave a negative impact on your credit report. Creditors might see this on your credit report and decline to give you the credit or offer you higher interest rates. While it is important to rebuild your credit, it is best to do it the right way. Learning from past money-management mistakes can prevent the same process from happening again. Additionally, obtaining a secured credit card can help rebuild your credit over time.
As mentioned above, bankruptcy should be treated as the last resort when it comes to paying off your debt. These alternative options affect your credit score less than bankruptcy and will still allow you to keep your property and assets:
- Working with a government-approved credit counselor to create a debt management plan.
- Opening a debt consolidation loan.
- Approaching your creditors about a more manageable repayment plan.
At ORNL Federal Credit Union, we want you to learn and thrive! If you have any questions in regards to financial education or our services, please contact us. We would be happy to help!