Things to Consider Before Filing Chapter 13 Bankruptcy | Credit ...

Things to Consider Before Filing Chapter 13 Bankruptcy

Filing Chapter 13 bankruptcy can be a life-altering decision. While this option can temporarily halt creditor collections and repossession of property, it can cause serious financial harm over the long term.

Not only does filing Chapter 13 bankruptcy destroy credit ratings and prohibit debtors from obtaining credit for many years, it can also limit housing and employment opportunities. The world revolves around good credit ratings and many employers and landlords require applicants to have high FICO scores before offering jobs or rental homes.

Additionally, the cost of filing bankruptcy can be costly. There are court filing fees, legal fees, credit counseling costs, and repayment of outstanding debts. In 2005, new bankruptcy laws were enacted. Known as the Bankruptcy Abuse Prevention and Consumer Protection Act, these laws forever changed the way people can obtain debt relief.

BAPCPA requires most debtors to reorganize debts under Chapter 13. Debtors are required to remit monthly installments to the bankruptcy Trustee for as long as 5 years. During this time, debtors cannot take on new debt and must remain current with all other living expenses in addition to Chapter 13 payments.

These financial restrictions often cause debtors to fail out of bankruptcy; meaning they cannot comply with financial obligations of reorganized debt. When debtors are unable to adhere to payment terms there is a strong probability their petition will be dismissed through the court. When this occurs debtors lose court protection and creditors can repossess property secured by loans or obtain creditor judgments that allow them to collect through wage garnishment.

Another consideration of entering into personal bankruptcy is BAPCPA requires petitioners to engage in credit counseling before approving the petition. Bankruptcy is governed by the U.S. Justice Department and counseling must be obtained through agencies approved by the Trustee. Many of these agencies offer discount rates, but debtors are responsible for associated costs.

In some cases, debtors can avoid bankruptcy through credit counseling. Some agencies will help debtors develop a payment plan or negotiate with creditors to reduce interest or remove penalties or late fees.

Unfortunately, credit counselors are not usually capable of helping debtors negotiate with mortgage lenders to prevent foreclosure. Debtors often turn to personal bankruptcy as a way to save their home. The problem with this strategy is if debtors fail out of bankruptcy banks can quickly commence with foreclosure action.

Last, but not least, bankruptcy remains on credit reports for 7 years or longer. It is not uncommon for FICO scores to drop by 60 points or more, which often places debtors into a lower credit bracket. Interest rates are assessed based on credit scores. The lower the score the higher rate of interest.

Although debtors are not allowed to incur new debts during their bankruptcy plan, once they can qualify for credit chances are they will be assessed with considerably higher interest rates and reduced credit limits. Even if debtors comply with Chapter 13 payments and pay all other bills on time, it will take at least 1 to 2 years to restore FICO scores.

It can be beneficial to research bankruptcy alternatives such as debt consolidation or debt settlement. Debtors with sufficient home equity might qualify for a home equity loan which allows them to pay off high interest loans using their home as collateral.

Alternatives are not without risk, so it is important to carefully research each option. Researching available debt relief options can help debtors determine if filing Chapter 13 bankruptcy is the right choice.

If you are considering filing Chapter 13 bankruptcy, it?s important to understand the new bankruptcy laws. Real estate investor, Simon Volkov offers a comprehensive personal finance article library offering bankruptcy information and strategies to avoid bankruptcy at www.SimonVolkov.com.

Source: http://www.uscreditnews.com/9514/things-to-consider-before-filing-chapter-13-bankruptcy/

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