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Pitfalls of Declaring Bankruptcy

Monday, August 2nd

Pitfalls of Declaring Bankruptcy

When all other options have failed, those who are mired with extensive financial debts may find themselves facing the option of declaring bankruptcy.

There are two kinds of bankruptcy for which Americans are able to file: Chapter 13 and Chapter 7.

Chapter 13 bankruptcy, also known as "reorganization bankruptcy," is designed to allow consumers to repay creditors in full or in part. Consumers are given a three to five year window to repay their debts according to the terms of the bankruptcy agreement. Chapter 13 bankruptcy allows the debtor to keep their assets because they have agreed to work out a repayment schedule for creditors.

Qualifying for Chapter 13 bankruptcy involves an individual's ability to prove they earn enough money to be able to repay their creditors during the length of the repayment process. If a debtor is unable to prove financial ability to repay, they will not be permitted to file under Chapter 13.

The other kind of bankruptcy is known as Chapter 7, which involves all or some of a person's property being sold in order to settle their debts. Some property, such as clothing, vehicles and furniture, is considered exempt and cannot be liquidated during Chapter 7 bankruptcy.

There are some pitfalls to filing for bankruptcy that should be considered prior to making the move.

The most serious pitfall is that it will negatively affect one's credit report for 7 to 10 years. It can lower one's credit score, which will make it incredibly difficult to secure new lines of credit, including credit cards and loans.

Filing for bankruptcy also can affect a person's ability to secure future employment. In today's employment environment, prospective employers have made it routine practice to conduct full background checks on candidates for hire - which includes a copy of one's credit report. Over 80 percent of employers who were polled in 2012 said they use background checks and financial reports as a factor in the hiring process.

Those who have spotty financial histories are less likely to be hired than their more financially-secure counterparts.

Another hidden disadvantage to filing for bankruptcy is that the state and federal governments may not be required to provide tax refunds annually. Any money that may have been refunded could be garnished in order to pay creditors.

Those who have successfully filed for bankruptcy also can expect to pay higher interest rates for credit cards and other loans - if they are even able to secure them. Like consumers who have bad credit and low credit scores, those who have filed for bankruptcy can expect to be subjected to outrageously high interest rates for the duration of their bankruptcy and sometimes even a few years beyond it.

Another serious disadvantage to bankruptcy is that it may not clear all debt that is owed. Even in the case of Chapter 7 bankruptcy - when a debtor's assets have been liquidated in order to pay creditors - some debt will remain exempt from the bankruptcy process. The holders of that debt may come back on the consumer for repayment of the full amount owed.

While there are both advantages and disadvantages to filing for bankruptcy, consumers must evaluate their individual circumstances and then determine which outweighs the other before making the decision to file. Thankfully, there are other options, such as debt consolidation and debt settlement, which can help a consumer much better than declaring bankruptcy. A knowledgeable debt relief company can guide consumers through which option is best for them.

The Best Debt Relief Companies Compare Debt Relief Companies Compare Debt Relief Company Reviews What are the best Debt Relief Companies Best Debt Relief Company Reviews

Debt Relief Company FAQ

Debt relief is a process that helps people get out from under their ever-mounting financial obligations. This can be accomplished through Debt Negotiation, Debt Settlement, Debt Consolidation or Repayment Plans, among other strategies.
You'll need to have a certain amount of debt to be eligible for debt relief, which varies according to which relief service you choose. Some require a minimum unsecured debt of $7500, while others specify that you need to owe at least $10,000. Also, some debt relief providers aren't licensed in all 50 states - so you may be eligible for debt relief but the service you're considering isn't available in your state.
Believe it or not, many debt relief services are free! Most providers give you a no-cost consultation, analyzing your financial situation and making recommendations tailored to your needs. But, there are some fee-based services, especially if you want someone to negotiate with creditors on your behalf.
Many of the strategies used by debt relief providers can be done on your own, yes. But, in the amount of time it would take you to get up to speed and learn what those strategies are, you could be paying hundreds (or thousands!) of dollars in interest. It's almost always a smarter financial move to have the experts do the work for you.
The first step is usually the complimentary consultation, where a representative will go over your debt situation and find out your goals, needs and timeframe. From there, it will depend on which approach you decide to take - but, for the most part, the debt relief service will be in charge of contacting your creditors and working out the details for reducing what you owe.
No two consumers are alike - and debt relief strategies vary as well. Some services offer relief through a personal loan, allowing you to pay off high-interest debt with a lower-interest arrangement, so naturally your situation will change as soon as your loan is funded and used to reduce your monthly payments. On the other hand, if your service is negotiating with your creditors to reduce or eliminate what you owe, that can take several weeks to months.
Most of the time, there isn't. A few debt relief services offer a 100% customer satisfaction guarantee, allowing you to cancel your plan without fees or penalties. Read the fine print of any contract before you sign up, so you'll know exactly what's promised - and what isn't.
Debt relief may sound too good to be true, but it's a legal, well-known method for reducing the debt burden faced by many consumers. Although some fly-by-night services pop up from time to time, most companies offering debt relief have been in business for a decade or longer. You can always check for a company's listing with the Better Business Bureau for further confirmation that it's a trustworthy option for debt relief.

Compare Debt Relief Companies

Select any 2 Debt Relief Companies to compare them head to head

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  • National Debt Relief
  • Credit.org
  • Curadebt
  • Upstart
  • SoFi
  • LendingTree
  • Upgrade
  • LendingClub
  • CareOne Debt Relief Services
  • American Debt Enders
  • Accredited Debt Relief
  • OneMain Financial
  • Savvy Money
  • Debt Consolidation Care
  • Fast Track Debt Relief
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