The Importance of a Good Credit Rating

Many people think filing bankruptcy is the easiest way out. Actually you should avoid bankruptcy at all costs. Filing bankruptcy is the worst thing you can do to your credit. A bankruptcy can stay on your credit report up to ten years from the day of filing bankruptcy. Credit grantors will consider your bankruptcy when evaluating you for a personal loan. You may receive credit but only if a predetermined amount of time has passed, or the bankruptcy is no longer on your credit report. Attaining a loan after filing bankruptcy is difficult and could cost you more in interest rates and fees.

There are two categories of bankruptcy: reorganization (chapter 11 bankruptcy, chapter 12 bankruptcy, and chapter 13 bankruptcy) and liquidation (chapter 7 bankruptcy). In a chapter 7 bankruptcy, a trustee collects your non-exempt property, sells it, and distributes the proceeds to your creditors. You may use future earnings to pay creditors in a chapter 11 bankruptcy, chapter 12 bankruptcy, or chapter 13 bankruptcy. There are differences between filing a chapter 13 bankruptcy and a Chapter 7 bankruptcy. Chapter 13 bankruptcy enables a debtor to retain certain assets that would otherwise be liquidated in Chapter 7 bankruptcy.

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Filing bankruptcy begins by filing a petition in Federal bankruptcy court. You must file a statement of assets and liabilities as well as schedules listing creditors. Once you have finished filing bankruptcy, your creditors are prohibited from taking any action to collect discharged debts.

There are other negatives when filing bankruptcy. In chapter 13 bankruptcy you may end up paying back 50% or more. If you miss a payment during chapter 13 bankruptcy you could end up in breach of court and forced to pay all the debt. Filing bankruptcy limits your personal spending to items that the court considers essential. Also, the majority of debtors don't complete their chapter 13 bankruptcy repayment plans. Although most people filing chapter 13 bankruptcy assume they'll complete their plan, only about one third do. A chapter 7 bankruptcy may stay on your credit longer than a chapter 13 bankruptcy. Here you would be paying nothing back to your creditors. If you own a home with significant equity, have assets to protect, or have co-signers to a loan, you probably cannot file chapter 7 bankruptcy. If passed, recent bankruptcy law proposals will make filing bankruptcy even more difficult.

In some cases filing bankruptcy may be necessary. However, you should avoid bankruptcy if at all possible. A competent debt reduction company can help reduce your debts to an affordable level so you can avoid bankruptcy.

See "Questions About Bankruptcy"