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Bankruptcy Effects to Your Credit Score

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By : Sonia Smith    99 or more times read

Generally, a bankruptcy is the least desirable choice for you when you finances have gotten out of control. However, if your financial standing has been going down for a while, your credit score is likely so bad that filing a bankruptcy does not do much to make it worse.

Bankruptcy could offer relief in a way that it puts a stop to the never-ending demand letters and telephone calls from creditors and collection agents. Its effect on your credit standing depends in part on the type of bankruptcy you will file.

The Chapter 13 bankruptcy is also known as reorganization. It lets you keep certain property like a car or a mortgaged home that you might have lose otherwise. Reorganization lets you pay off your default in a three year or five year time rather than surrendering your property. In this type of bankruptcy, a court notification will be received by your creditors that will stop their collection efforts within fifteen days after you file for the petition. This will have a negative effect on your credit but otherwise shows your willingness t pay your debts rather than discharging them. This might help you get new credit within a year or so.

The Chapter 7 bankruptcy is a straight bankruptcy that involves liquidation of all your assets not exempt in your state. Exempt assets or property may include work-related tools and basic household furnishings. Some of your property may be sold by a court-appointed officer or turned over to your creditors. A Chapter 7 bankruptcy may be filed only once in every six years. This kind of bankruptcy is the blackest mark you can have on your credit report. While it absolves you of your debts, it makes getting new loans or credit cards unlikely for at least within a year or two or even longer. Nevertheless, there are some exceptions like federal student loans.

Bankruptcy could stay on your credit report within ten years, which makes it difficult to acquire credit, buy a home, get a life insurance or in some instances even getting a job. However, it is a legal procedure that could provide a new start for those who are unable to satisfy their debts. Both Chapter 13 and Chapter 7 bankruptcy should be filed in federal court. The current filing fee is around $160 and additional lawyer’s fees.

Both types of bankruptcy could eliminate unsecured debts and avoid foreclosures, repossessions, garnishments and debt collection activities. They also provide exemptions that allow people to keep some assets, but the exemption amounts could vary in every state. Bear in mind that personal bankruptcy usually does not erase child support, alimony, fines, taxes and student loan obligations. Unless you have an acceptable plan to keep your debt current in a Chapter 13 bankruptcy, it does not let you keep property if your credit has an unpaid mortgage or lien on it.

Credit counseling may be a good alternative if you feel financially burdened or planning on filing a bankruptcy.
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