Filing for Bankruptcy: What You Need to Know

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Filing for Bankrtupcy: What You Need to Know

By: Tim Chen

If you’re considering filing for bankruptcy, you’re not alone. More than 1.4 million Americans filed for bankruptcy just last year. For many of these people, bankruptcy allowed them to escape from financial ruin and begin the long road back to good credit and financial stability.

The decision about whether to file bankruptcy is usually not clear-cut and there are several factors that go into it. Sometimes, filing for bankruptcy may hurt you more than doing nothing. Other times, doing nothing may hurt you far worse than declaring bankruptcy.

Some of the factors that go into the decision about whether or not to declare bankruptcy are more general, such as your yearly income, overall assets and the specific type of debt you have. There are other areas to consider which are more personal such as your overall comfort with declaring bankruptcy or whether you’re tied to keeping your home or paying off a specific debt.

Bankruptcy should ultimately be reserved as a last resort option when there’s no other way out. Options before declaring bankruptcy include attempting to pay off the debts yourself or repaying them with the help of a credit counselor (stick with one recommended by the Department of Justice). You could also consider debt consolidation, which involves taking out a new loan in order to pay your old ones, such as a balance transfer credit card.

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If these options have already been exhausted, there are two types of bankruptcy that individuals can file for. Chapter 7 bankruptcy wipes out all of your debts, while Chapter 13 bankruptcy will require you to pay back some of the debts over time.

If you do decide to declare bankruptcy, be sure to educate yourself on the new laws regarding this process. The days of declaring that you can’t pay your bills and ending up with a clean slate are long gone. In 2005, laws were passed that make it far more difficult to declare bankruptcy. In addition to spending upwards of $1,500 just to start the filing process, you will be required to go through pre-bankruptcy counseling at your own expense and may be required to undergo credit counseling afterwards if your filing is approved. Furthermore, repayment of your debt may actually be mandatory if you exceed certain income levels.

Even if you do manage to receive a clean slate in terms of the debt you owe, the effects of declaring bankruptcy will linger for years to come. In addition to losing most of your assets, you’ll lose anywhere from 130 to 240 points out of a possible 850 in your credit score, automatically turning your score into a subprime one. Not only do credit reports show a filing of bankruptcy for up to a decade afterwards, but there’s no way to undergo this process quietly. The final step to declare bankruptcy takes place at a public hearing in a court of law and there may be a public announcement of your filing in the legal notices section of your local newspaper.

The most important thing to remember if you decide that bankruptcy is the only option is to get professional help. Do not do this on your own. Talk to a lawyer or credit counselor. Not only can they help you best assess your options, but they’ll work with you to develop a strategy to minimize your overall losses.

It may seem like the end of the world, but like many people, filing for bankruptcy gets the creditors off your phone and puts you back in control of your financial life.

Afterwards, you can look forward to rebuilding your credit with a secured credit card, which we recommend you get from a local credit union or a large national bank – avoid internet ads from companies you’ve never heard of. After 12 to 18 months of good behavior, you can move onto an unsecured credit card, but we think it’s best to stay away from teaser deals that can get you in trouble, like store credit cards.

A bankruptcy may be your ticket back to financial freedom. But Chapter 13 bankruptcies stay on your record for 7 years, and Chapter 7 bankruptcies stay on your record for 10 years, so weigh your options carefully before proceeding, and make sure you’ve exhausted every other possibility before you go down this road.

Tim Chen is founder and CEO of, a website that helps consumers to compare credit card offers.  Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and U.S.News.

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