Bankruptcy - The Last Resort for Credit Repair

By: John Campbell
Submitted: 2007-01-17 16:16:50
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Bankruptcy may destroy your credit. So why would you want to file for bankruptcy if you’re trying to repair your credit?

For starters, bankruptcy may wipe out debts that have become unmanageable. These debts will drag your credit score down with each missed payment and inevitably destroy your credit. If you’re faced with debts that you can no longer pay you may not have any choice but to file for bankruptcy.

If you qualify, bankruptcy can wipe out many of your debts and “clean the slate” so you can regain control of your finances. Bankruptcy is more a tool of debt relief than a tool of credit repair.

You need to carefully weigh the pros and cons before filing for bankruptcy. Are your debts going to be so unmanageable that they’ll hurt your credit report for years to come? Is a bankruptcy going to be better for your credit history in the long run than all the debts that may be accumulating on your credit report today?

Bankruptcy should only be used as part of a long-term plan to repair your credit. A bankruptcy will be listed on your credit report for at least 7 years and will negatively impact your credit score for at least that period of time. You should only file for bankruptcy if you plan to take concrete steps to repair your credit after your bankruptcy is finalized.

Depending on what debts you have incurred, you may file for either Chapter 7 or Chapter 13 bankruptcy. A Chapter 7 bankruptcy stays on your credit report for 10 years, while Chapter 13 stays on your credit report for 7 years.

Under Chapter 7 bankruptcy, certain eligible assets may be liquidated to pay off your debts. With Chapter 7 bankruptcy, your debts will either be redeemed or reaffirmed. With redemption, you pay any secured creditors a lump sum as collateral for each secured debt. The lump sum you pay is based on the current value of any asset the creditor has secured. Any remaining debt is discharged after you make a lump sum payment and the asset becomes yours free and clear. If you can’t pay the lump sum your asset may be seized and resold by the creditor.

Any of your debts that are reaffirmed may be made payable under the original terms of the agreement you signed with a particular creditor. The debt will still be legally enforceable and must be repaid, with the creditor holding a security interest on the debt until full repayment takes place.

Under Chapter 13 bankruptcy, you have to undergo a mandatory repayment plan to pay off your debts within 5 years. This will allow you to reorganize your debts so you can keep any property like a home or automobile from being seized as part of the bankruptcy proceedings.

Filing for bankruptcy won't eliminate any alimony, child support, fines, taxes, judgments against you or student loan debts. You may be able to get some student loan debts liquidated if you can prove extreme financial hardship.

If you're found guilty of committing fraud in establishing a line of credit for yourself, you'll be fully responsible for all the debts incurred in these credit lines.

Once you’ve successfully filed for bankruptcy you can finally begin the long and arduous road to credit repair. You may still qualify for some lines of credit with very high interest after you file for bankruptcy and should just use these credit lines to show that you can manage your debt this time around. Make a few small purchases and make small enough monthly payments that will ensure a small portion of your debt will still remain on these accounts from month to month. Positive repayment history on these accounts will slowly build your credit rating once again.

Bankruptcy will provide you with no quick fixes if your ultimate goal is credit repair. Only time and a lot of diligence on your part will get your credit back on track. The steps you take today will have an impact on your credit for years to come.

Article source: Expert Articles