If you feel like it’s impossible to dig yourself out of credit card or other debt, filing for bankruptcy may seem like your only hope to eliminate debt and make a fresh start. However, filing for bankruptcy carries a hefty price tag when it comes to your credit rating.
That’s because a bankruptcy judgment – which can stay on your credit report for up to 10 years – has an adverse effect on your credit score. Filing for bankruptcy shouldn’t be your first option, but if you must file, it pays to know how bankruptcy could affect your life.
Find out 10 things to know before filing for personal bankruptcy below.
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1. Know the differences between chapter 7 and chapter 13
Individuals typically file either chapter 7 or chapter 13, two very different types of bankruptcy. Chapter 7 is a “liquidation” bankruptcy where most of your property is sold and used to pay off your debts and other debts are discharged so you never have to repay them.
A chapter 13 bankruptcy protects secured assets such as your house from being sold when you file, stops collections and allows you to reorganize your debts and make payments for a period of three or five years. If you catch up on back payment during the repayment period, you will be able to keep your assets.
Find out: How to Choose the Right Path for a Personal Bankruptcy Filing
2. You must be eligible to file
Before you’re allowed to proceed with chapter 7 bankruptcy, you must first pass what’s known as a “means test”, an analysis of your finances conducted by an independent trustee after you file to determine whether you qualify for bankruptcy.
The means test includes an analysis of the last six months of your income and also your financial history for indicators of potential bankruptcy abuse such as maxing out all your credit cards the week before you file or taking out an excessive amount in payday loans or cash advances within 90 days of filing.
Find out: When Should I File for Bankruptcy and Do I Qualify?
3. You must seek credit counseling before filing
Except under certain emergency circumstances, you aren’t eligible to file bankruptcy unless you’ve received credit counseling within 180 days before filing, according to UScourts.gov. You must also complete a debtor education course before your debts can be discharged.
However, you must obtain free or nominal-fee credit counseling or take a debt education course only credit counseling agencies and debt education providers that have been approved by the U.S. Trustee Program.
4. Consider hiring an attorney
You can file for bankruptcy “pro se” without an attorney, but you’re probably better off if you hire a bankruptcy attorney to file. For one thing, an attorney can explain the difference between filing for chapter 7 or chapter 13 bankruptcy and help you determine which option is best.
Hiring a bankruptcy attorney also helps ensure that you’re not unwittingly leaving out property and assets, failing to submit all forms or committing costly or even fraudulent errors.
5. You must pay to file
If you’re in financial straits, the last thing you need is one more bill to pay. No matter how broke you are, however, filing bankruptcy isn’t free. For starters, the federal bankruptcy filing fee is $350.
Additional costs could include attorney fees, federal miscellaneous and administrative fees and fees for required credit counseling and the debtor education course you must take before your debts can be discharged.