Debt doesn't just empty your wallet, it can take a toll on your mental health, your relationships, and your confidence in the future. Before you decide that filing for bankruptcy is your only option, know that there are steps you can take to turn things around.
Chapter 7 vs. Chapter 13 Bankruptcy
First, it’s always wise to understand your options, as well as how bankruptcy works.
Chapter 7 Bankruptcy: With this type of bankruptcy, your unsecured debts like credit cards, medical bills, and personal bills will be eliminated. However, you may have to part with assets like your home to repay creditors. Ultimately, your credit will take a severe hit, and your filing will remain on your credit report for 10 years.
Chapter 13 Bankruptcy: While you may be able to keep your assets with Chapter 13, you will likely have to repay some or all of your debt through a repayment plan. Like Chapter 7, your filing stays on your credit report, typically seven years with Chapter 13.
Declaring bankruptcy has a long-term impact, from damaging your credit score to making it harder to qualify for a loan or get lower interest rates. You could lose property and still be liable for some of the unresolved debts, making it a last resort.
Here’s What to Consider Before Declaring Bankruptcy
Create a Budget: If you don’t have a budget, it’s time to create one. Make sure you know all your debt and interest rates, so you can include it when looking at your monthly take-home. If you can, look for ways to cut back. Eating out, streaming services, going to the movies, are all things you can cut back on while you’re paying back debt.
Talk to Your Lenders: Some lenders may offer hardship programs that will temporarily reduce or restructure your repayment requirements if you’re experiencing financial hardship, like a job loss, medical emergency, or divorce.
Tackle Debt With a Repayment Strategy:
- Debt Snowball: Start by putting any extra money toward your smallest balance while making minimum payments on everything else. Once that debt is paid off, roll that payment into the next smallest balance and keep going. The momentum can be a great motivator when repayment feels endless.
- Debt Avalanche: Similar in structure, the debt avalanche targets your highest interest rate first. It may take longer to eliminate your first debt, but you'll pay less interest overall, making it the more cost-effective of the two strategies in the long run.
Talk to a Credit Counselor Regarding Bankruptcy
Sometimes it’s best to ask for help. A certified credit counselor will work with you to assess your financial situation, build a realistic budget, and help you create a path forward. If your debt is overwhelming, they can also enroll you in a debt management plan. This allows them to negotiate directly with your lenders to get a lower interest rate while consolidating your debts into a single, affordable monthly payment. Most plans are completed within three to five years, putting a real end date on your debt.