PHOENIX--(BUSINESS WIRE)--For people struggling under a mountain of debt, bankruptcy may seem like an opportunity for a fresh start. However, few understand what it really means to declare bankruptcy or the long-term repercussions.
“Bankruptcy should be the last possible option,” said Michael Sullivan, a personal finance consultant with Take Charge America, a national nonprofit credit counseling and debt management agency. “The financial and credit implications are considerable, so it’s best to exhaust all other options first.”
Sullivan offers five points to consider before pursuing bankruptcy:
It kills your credit. Nothing has a more negative impact on your long-term credit than bankruptcy, which stays on your credit report for seven to 10 years, making it difficult, if not impossible, to qualify for an auto loan on reasonable terms or for a mortgage. You may have trouble renting an apartment or getting a job since credit is often a reference point for landlords and employers.
It’s complicated and costly. It’s not easy to file bankruptcy. First, you have to determine whether you’re filing for Chapter 7, Chapter 11 or Chapter 13. Then, the federal government requires a Pre-Filing Bankruptcy Credit Counseling certificate from an approved credit counseling agency and a course in financial management prior to discharging any debts. After you file, you must obtain a Post-Filing Bankruptcy Debtor Education certificate. You’re also on the hook for filing fees and any attorney expenses for completing the bankruptcy process.
It doesn’t clear all debt. Many believe that filing bankruptcy will give them a fresh, debt-free start, but that’s not the case. Student loans cannot be discharged in bankruptcy, and neither can child support, alimony, criminal restitution or debts resulting from fraud.
You may have alternatives. Two of your other options could include debt settlement or debt management.
- Debt settlement has a downside. It seems like a smart alternative to bankruptcy, but there’s an ugly side to debt settlement. With debt settlement, you stop sending money to your creditors and send a new, lower monthly payment to the debt settlement company instead. Once your accounts are a few months past due, the company works to negotiate a settlement with your creditors. In the interim, creditors report your late payments. Often, the debt settler can negotiate a settlement that’s considerably less than your original debt, but the costs are still significant. Late payments remain on your credit report for up to seven years.
- Debt management may be an option. You might consider working with a nonprofit credit counseling agency on a debt management plan, which combines multiple creditor payments into a single monthly payment. It reduces the time it takes to repay credit card debt, while lowering the total amount of interest paid. It also eliminates collection calls, late fees and over-limit fees.
For more information on debt management, credit or bankruptcy counseling call (866) 528-0588 or visit www.takechargeamerica.org.
About Take Charge America, Inc.
Founded in 1987, Take Charge America, Inc. is a nonprofit agency offering financial education and counseling services including credit counseling, debt management, student loan counseling, housing counseling and bankruptcy counseling. It has helped more than 1.6 million consumers nationwide manage their personal finances and debts. To learn more, visit www.takechargeamerica.org or call (888) 822-9193.