If you’re in debt over your head, afraid of being sued and just want the collection calls to stop, you may be considering bankruptcy. Bankruptcy gives those with more debt than they can repay a chance at a fresh financial start. It stops court actions and Chapter 7 bankruptcy, specifically, completely discharges unsecured and some secured debt. However, it’s important to consider how bankruptcy will impact your credit and financial goals. To help assess if this is an option for you, here are seven questions to ask yourself before filing for bankruptcy:
1. Do I have immediate financial goals?
Chapter 7 bankruptcy will be on your credit for up to 10 years, but it will typically only impact your plan to finance the purchase of a car, home or other large expense over the next several years. In general, you will either not qualify for these loans or will pay higher interest rates until your bankruptcy case has been discharged for one, two and three years.
2. Do I have funds or access to funds that will enable me to settle my debts?
Many creditors or collection agencies are willing to negotiate a settlement. If you have access to enough funds to settle your accounts, you may be able to settle your debt before your creditors pursue legal action. If you can’t settle all of your debts that quickly, you may still want to pursue debt settlement or debt consolidation to avoid the credit hit that comes with bankruptcy.
3. Am I in danger of being sued soon by creditors?
One of bankruptcy’s main benefits is the legal protection it provides for people with debt. This protection eliminates judgments, liens and wage garnishments, and stops all collections – even a foreclosure. If collectors tell you you’re in a “pre-legal” phase or if you’ve received notice that a suit has been filed, then you may need to quickly determine how best to respond and bankruptcy may be a good option.
Related article: What does it mean when a collection agency uses the term “pre-legal” and how can Resolve help?
4. What do I have to lose?
Depending on the state you live in, you may be forced to liquidate assets, particularly when you file Chapter 7 bankruptcy. If you have assets you want to keep during a bankruptcy filing, it’s important to understand your particular state’s laws. Depending on where you live, you could lose some of your personal belongings, including your car or home.
“Another option may be to sell some assets and use the proceeds to settle your debt and avoid bankruptcy all together,” said Michael Bovee, co-founder of Resolve.
Related article: Thinking about bankruptcy? These options may be better
5. Can I qualify for Chapter 7?
Of the three types of bankruptcy available to consumers, Chapter 7 is the fastest and lowest-cost option and doesn’t have the failure rates associated with Chapter 13. Qualifying for Chapter 7 depends on several factors, including household income and the number of people in your home.
“Chapter 13 is not a great option for most people but a palatable one if you’re in the right set of circumstances where you can’t file Chapter 7, you can’t come up with the money to settle or you need creditor protection,” Bovee explained. Those who don’t qualify for Chapter 7 may want to look at other debt relief solutions like debt settlement, he said, before deciding to file Chapter 13.
6. Can I handle the negative impacts?
Bankruptcy has a lasting impact on your credit and, for many people, bankruptcy carries a stigma of financial failure. Setting aside the emotional reasons people have for not filing chapter 7, do you work in a financial services career or require a security clearance for your job? Bankruptcy should still be on the list of potential solutions, but this is another negative side effect for some. If you can live with those factors, bankruptcy can give you a fresh start.
Related article: 6 steps to rebuild your credit after bankruptcy
7. Do I have other reasonable options?
Bankruptcy may not be your only, or best, option for resolving your debt. Because it’s a big decision, it’s wise to consider all your options before filing. You may want guidance from a bankruptcy attorney; most offer a free, no-obligation initial consultation.
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.