Many people think of bankruptcy as a form of nuclear warfare against debt, to be avoided at all costs, but it can offer quite a few benefits. When you file for bankruptcy protection, you will have an automatic stay that protects you from future collection activities. Depending on the form of bankruptcy that you file, you will also have either restructured debt or substantially decreased financial obligations.
Chapter 13 bankruptcy allows you to streamline your debt and reduce your monthly payments, while Chapter 7 bankruptcy involves the liquidation of certain assets for the discharge of unsecured debt. Both forms of bankruptcy may have a negative impact on your credit score in the short term, but they can also offer long-term benefits for your financial circumstances.
Bankruptcy frees up your income for the bills that matter
Whether you have thousands of dollars in hospital debt because of a car accident or have maxed out your credit cards and can only make the minimum payment, people underwater financially often struggle to make even the minimum payments on all of their debts.
When you can’t pay down the principal on a debt, the fees and interest can quickly push it to a point where you can no longer meet your obligations every month. Bankruptcy offers either consolidation of some debts or the discharge of them, which means that the amount you have to pay each month will be lower. When you have less money going out, you can pay more toward the bills that matter the most.
Bankruptcy replaces multiple bad marks on your credit with one big blemish
Every time you make a late payment, your credit score suffers. The more accounts you have in delinquent status, the more drastic the impact on your credit score. Your debt to income ratio, the amount of debt you currently carry, and judgments or garnishments against you will also all drag your credit score down.
When you receive a bankruptcy discharge, it is true that the public record will impact your credit score for either 10 years or seven years, depending on the kind of bankruptcy filed. However, instead of several or dozens of negative marks on your credit, there will only be one. A single bankruptcy will have less of an impact on your credit than five delinquent accounts, a judgment and an overdrafted account.
Bankruptcy provides an opportunity to rebuild good credit
After the discharge of unsecured debt in bankruptcy, you will inevitably start receiving offers for new lines of credit and credit cards. Once you discharge all of the overwhelming debt you once had, it may be much easier to pay off a small balance every month and establish a positive credit history.
Many times, you can secure a credit card within a few months of your discharge. Bigger loans, from car loans to mortgages, may be available as soon as one or two years after you’re discharged. Instead of viewing bankruptcy as something embarrassing or tragic, you can see it as an opportunity to change your financial life.