Personal finance

Overwhelmed With Debt? Is It Time to File for Bankruptcy?

What you need to know before taking this big step

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The pandemic has put a financial strain on so many families. Some of you may even feel like you’re in financial ruin. But does that mean you should consider filing for bankruptcy?

It’s a tough question to answer alone.

The number of people filing for bankruptcy has actually dropped during the pandemic because of federal protections in place. But those won’t be around forever.

If you are hitting rock bottom and considering bankruptcy, experts at the National Consumer Law Center warn against making a quick decision. 

“I think one rule of thumb for people to consider is whether the amount of debt they have is more than they can reasonably expect to be able to repay and if their creditors are starting to take action against them to collect,” said Sarah Mancini, a bankruptcy attorney at the National Consumer Law Center.


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Mancini says it’s important to understand your options when filing for personal bankruptcy. There are two types: Chapter 7 and Chapter 13.

Chapter 7 is known as “liquidation bankruptcy,” and it’s the most common. Your debt will be wiped out to give you a fresh start. You will be able to keep your home if you aren’t behind on your mortgage payments, as well as your car and most belongings.

But if you have a second home, recreational vehicle, or luxury items, they’ll be sold off to pay your creditors. Chapter 7 is usually best for those with credit card and medical debt.

There are income limits on who can file for Chapter 7 bankruptcy. If you qualify and the judge approves your case, the process is usually complete in three to four months.

Chapter 13 is known as the “wage earner’s plan,” because you need regular income to qualify.

The court will put you on a three-to-five-year repayment plan. You will be able to keep all of your assets, but don’t expect to keep much of your paycheck beyond basic living expenses.

“So it’s not a get-out-of-jail-free card; it’s not a silver bullet,” said Mancini. “You know it depends on whether you can afford to pay what you’re required to pay under the bankruptcy code.”

Mancini says Chapter 13 is best for people who are behind on their mortgage.

Filing for bankruptcy will basically ruin your credit. Chapter 7 stays on your report for 10 years and Chapter 13 for seven years. 

“I think the negative credit consequences sometimes get overstated,” said Mancini. “Because the reality is, for someone who is overwhelmed by debt and has fallen behind already on their mortgage, their credit card payments, the credit score has already taken a hit.”

Mancini says filing for bankruptcy is one of the most significant financial decisions that a person can make and trying to do it without an attorney representing you is a huge risk.

If you need help or guidance, filing for bankruptcy does not have to add to your money troubles. The National Consumer Law Center has information on where to find free legal services to help you through this difficult time.

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