By HRRC Financial Counselor Keesha Allen. When deciding whether bankruptcy is right for you, look first at what bankruptcy can do. Bankruptcy is a legal process to give honest but unfortunate debtors – anyone who is having trouble paying their bills or meeting their financial obligations – a fresh start in creating and building financial wealth. However, bankruptcy is not right for everyone. There are disadvantages, as well as benefits, to consider. People with a small amount of debt and the ability to negotiate with creditors may find debt negotiation a better option.

Filing bankruptcy immediately creates an automatic “stay,” which stops all creditor collection action against you. This includes phone calls, wage garnishments, foreclosure proceedings, repossessions, and legal action. Bankruptcy can provide time for you to catch up on mortgage payments and save your home from foreclosure. It can also allow you to pay less on a vehicle loan and eliminate a second mortgage. The most important benefit of bankruptcy is that it can “discharge” (eliminate) most of your debt.

Though bankruptcy does have its “perks,” there are still down sides to filing for bankruptcy. The biggest disadvantage is that bankruptcy will stay on your credit report for ten years. Some companies will not give you a loan if you have a bankruptcy on your credit report, and those companies that do may increase their interest rate to cover the higher perceived risk. Another disadvantage is that not all liabilities are eliminated by bankruptcy. It may discharge unsecured debt (such as credit and charge card balances, medical bills, collection accounts, etc.), but student loans, recent tax debt, many legal bills, and child support arrearages will not disappear in a bankruptcy filing.

What property you can save will depend on whether you file for a “Chapter 7” or “Chapter 13” bankruptcy. A Chapter 7 “liquidation” bankruptcy is usually for low income filers with little or no assets. It will wipe out unsecured debt (like medical bills and credit cards), but some of your property may be sold to pay back creditors. In a Chapter 13 “reorganization” bankruptcy, you keep all your property, but you pay back all or part of your debt through a repayment plan. Your repayment amount will depend on your income, expenses, and type of debt, and will usually be spread over 3 – 5 years.

Before making the decision whether or not filing is suitable for your situation, you should contact a legal professional for a consultation. Many times, these advisors will suggest that you seek credit repair through a nonprofit organization if your circumstances warrant.  Contact HRRC Financial Counselor Keesha Allen at (216) 381-6100 ext. 13 if you want to explore credit repair as an alternative to filing for bankruptcy.