Bankruptcy is not a magic fix for all situations. It is important to remember that there are drawbacks to filing bankruptcy. These include:
1. Some debts do not go away with Chapter 7 Bankruptcy. You will still have to pay these debts after bankruptcy. These include:
- Child Support and Alimony
- Student Loans
- Tax Debts
- Criminal Fines and Restitution
2. Chapter 7 Bankruptcy may not give you enough help if you have “secured” loans like home loans or car loans. These loans can’t be wiped out if you want to keep the property. When you bought the home or car, you signed a contract that said the lender can take the property if you don’t make the payments. If you file Chapter 7 Bankruptcy, you have three choices:
- Return the property to the lender. The debt will be wiped out.
- Sign a new contract with the lender, saying you will keep making payments. This will let you keep the property. However, you have to be able to show that you can afford the payments once your other debts are wiped out.
- Pay the lender what the property is worth. This will let you keep the property. However, this is only possible if you have the money to pay for the property.
However, if you file a Chapter 13 Bankruptcy, you may get more time to catch up on payments. You can get up to five years. This can make a big difference if you are behind on payments and need help getting caught up. However, you have to show that you have enough income to make the payments.
3. Bankruptcy will hurt your credit score. If you file bankruptcy, your credit score will go down. However, if you are behind on bills, your credit score might already be low.
You may not be able to get any new loans or credit for a while after you file bankruptcy. When you do get a loan, the lender may charge you higher interest. Other people who can look at your credit score include landlords, a new employer, and car insurance companies. However, your current employer cannot discriminate against you for filing bankruptcy.
4. Bankruptcy will not wipe out debts for your co-signers. If you file bankruptcy, it will only wipe out the debt for you. If you have a co-signer on a debt, he or she will still have to pay the debt.
Is Bankruptcy My Only Option?
This depends on what problems you want to fix by filing bankruptcy. You might have a problem that can be fixed without filing bankruptcy. For example:
- Debt Collector Harassment. Is your main problem that debt collectors are harassing you? You probably don’t need to file bankruptcy just for this. The law says that if you ask them to leave you alone, they have to stop calling or writing you. You will still owe the debt, but they cannot harass you about it. If they still do not stop, they are breaking the law. You may be able to sue them. They also cannot call you at all hours, call other people about your debt, threaten you with jail or bodily harm, or use abusive language. Learn more about your rights about debt collector harassment.
- Collections, Lawsuits and Garnishment. Is your main problem that you have debts that are going to collections or lawsuits? Collections and court judgments can be very stressful. However, they are not always as bad as debt collectors make them seem. It is true that they are bad for your credit score, but bankruptcy is much worse. More importantly, sometimes a collector cannot take any money or property from you at all, even if they take you to court. How can this be? Some income and property is “exempt.” This means a creditor can’t take it to pay a judgment. If you do not make much money, or own valuable property, all your money and property might be exempt. Many Montanans are totally exempt from collectors, especially if you are on a fixed income. Learn more about exempt income and property.
- Financial Counseling. Financial counseling can help you understand your financial situation and options. The Department of Housing and Urban Development (HUD) trains and certifies non-profit housing counselors across the country. Because of this, you can have confidence that a HUD-approved housing counselor is well equipped to help you understand and evaluate your options. HUD-approved housing counselors can give advice on credit issues, renting, foreclosures, defaults, and buying a home. You can find a HUD-certified counselor near you.