Coming to the realization that you are in debt more than you can handle is tough. You have to figure out where to go after this realization. One of the options you have is filing for bankruptcy.
Once you start thinking about filing for bankruptcy, you have to decide if it is the right option for your situation. You will also have to determine what type of bankruptcy you should file. These decisions can have a significant impact on how your financial future is set up.
Purpose of bankruptcy
The purpose of bankruptcy is to help you to take control of your finances. The two different types of bankruptcy handle the path to this in different ways. In a Chapter 7 bankruptcy, your assets are liquidated and the funds are used to pay off creditors. Any remaining eligible debts are discharged without further payments. In a Chapter 13 bankruptcy, only some assets are liquidated. You would make payments on your debts according to a schedule set by the bankruptcy trustee. Once you have made all the required payments, which can take up to five years, remaining eligible debts are discharged.
In order to file a Chapter 7 bankruptcy, you have to meet requirements of the means test. There are also limits on types of previous bankruptcy filings you have and when those bankruptcies were discharged. You don't have to meet a means test for a Chapter 13 bankruptcy, but you do have to be able to make regular payments on the debts. One thing that you have to keep in mind here is that if you had co-signers on any of your debts, the co-signer will still be liable for the debts even if they are discharged on your behalf.
When you file for bankruptcy, you will lose some of your assets. Other assets are exempt from bankruptcy, so you should make sure that you learn about how your assets will be handled before you file. Typically, you would be able to keep your home in a Chapter 13 bankruptcy but you would have to make sure that you keep up the payments on it during the process.
Before you file for bankruptcy, think carefully about how it will impact your finances and your future. For example, you will have to do away with credit cards and your credit report will be impacted. This means that you will need to live off of your cash income only.