What is bankruptcy?
Bankruptcy is a legal status. This status has been imposed after a court order if a business or individual fails to repay it’s debts. Indeed, this sounds like something really bad if you are living in America as it affects your reputation and damages your credit rating. Once you’ve filed, applying for and receiving additional credit becomes very difficult. Here’s some additional information about bankruptcy and its various types.
In America, once bankruptcy is declared, this status remains on your credit report for 10 years. This doesn’t mean you won’t qualify for new credit a couple years afterwards, but there will be a significant cooling down period before you’re considered again. And, we probably don’t need to mention this, but it’s also not good for your credit score. With that said, in some cases bankruptcy could be a good option for a consumer.
When bankruptcy does make sense for a consumer?
Bankruptcy is not the end the world and it can be recovered from. Declaring bankruptcy absolves you from any type of unsecured debts, prevents foreclosures, and stops other debt collection activities. Although this could be expensive as you have to pay the lawyer fees, sometimes it’s worth the cost to “reset” your credit.
The time to declare depends on many factors. Some of these could be your mortgage, your current credit score, the danger of foreclosure or even being harassed by bill collectors. If you want to get rid of all of these things, and have explored all possible debt relief options, bankruptcy may be the best bet for you. This will not only eliminate your debts, but also help you to save your home and silence the collectors who may be harassing you. But, it may also be creating long term damage to your credit score.
How does bankruptcy affect my credit?
It has been believed that bankruptcy can actually give rise to your credit score, which is generally true, but in the short term only. Usually, the credit score is already battered at the time of declaring. Following a successful bankruptcy, all the debt has been removed which gives an artificial rise in the credit score. In the real world, the credit score has been declining for many years as a result of borrowing additional loans, obtaining credit, credit cards, and even other financial activities.
What other options are available?
For a person who does not have enough money to pay the debt, they should first consider a reputable debt settlement program. When we compare debt settlement vs. bankruptcy, debt settlement could be a great option. It is a settlement in which third-party companies pay the debt to your creditors on your behalf. It’s usually a significantly lower amount than you owed, and negotiated by the company who pay on your behalf. In addition, a debt settlement company can eliminate interest rates, drastically reducing your total cost and time to repay.
If you choose debt settlement over bankruptcy, you could be saving yourself from up to 10 years of negative credit history and difficulty obtaining credit. It does not only lower the amount of debt, but also helps you to avoid bankruptcy. The fees for debt settlement are usually far less than bankruptcy, and the damage to your credit that may incur from a settlement program usually recovers quickly.
In closing – Bankruptcy or Debt Relief?
Both have their merits, and their downsides. Bankruptcy often seems like a quick and easy way out from under your debt, but remember not everyone qualifies and the long-term damage may not be worth it. Debt settlement will also affect your credit, but quite temporarily, as the settlement company you choose pays off your debts, your debt to income ratio and payment accounts improve, reviving your credit score. Do your due diligence in researching your options before making any decision that can have a long-term impact on your credit.