How Filing Bankruptcy Helps
- A bankruptcy filing of any type stops a foreclosure on your primary home. A Chapter 7 bankruptcy will probably only stop it temporarily, but a Chapter 13 bankruptcy can stop a foreclosure permanently and allow you to keep your home. With a Chapter 13, you can include your past due mortgage amount in your repayment plan, and repay it along with other bills over a three-year or five-year period. You still must make your regular mortgage payments on time after you file. If the court determines you can afford your mortgage payment, you probably will be able to continue making payments and keep your house.
- Bankruptcy's biggest benefit is that it eliminates most of your unsecured debts, which are debts that are not backed by collateral. In a Chapter 7 bankruptcy -- also known as liquidation bankruptcy -- a court-appointed trustee takes possession of your assets that are non-exempt and sells them, using the proceeds to pay off creditors. When this is completed, the court issues a discharge order eliminating your debt. People filing a Chapter 7 may not have any non-exempt assets, so they would not lose any property. Property exempt from liquidation typically includes a car of a certain value, clothing, household appliances, pensions, a portion of the home's equity, government-issued benefits and a portion of wages, among other things. In a Chapter 13 bankruptcy, unsecured debts are paid off with a court-ordered repayment plan. When the plan is completed, usually in three or five years, the court eliminates all remaining eligible debts.
- Eliminating all your unsecured debt payments or placing them under a court-ordered repayment plan you can afford helps you start over with your finances. If you had been overwhelmed by debt, you can now build savings and concentrate on building a solid financial future. Immediately after a bankruptcy discharge, you do not face the past-due bills or the aggressive collection techniques of some creditors and collection agencies.
- Although bankruptcy usually causes a credit score to drop dramatically, in some cases the decrease in your score may be minimal. On rare occasions, your credit score could even improve. That's because you may have accumulated a number of negative entries in your credit report to arrive at the point where you needed to file for bankruptcy. Your credit rating was probably severely damaged as a result of late payments or collection actions, so the score could not drop much further. Those negative entries are erased when the court discharges them under bankruptcy, and although they are replaced by the negative bankruptcy entry, the balance of the debt you owe is reset to zero. This allows you to build your credit score from that point. Although the bankruptcy remains on your credit report for 10 years, the negative effect on your credit score declines as you approach the end of that 10-year period.
