and some taxes. These debts must be paid in full.
Similarly, Chapter 13, which can take just a few weeks, will not discharge you of your debts, but will help you work out a plan to pay them off over the course of three to five years. Often, your debts will be significantly reduced, and you could end up paying just 20 cents on the dollar of what you owe.
You might have to sell your property. Each state has an exemption stating how much equity in your home you are allowed to keep. For example, the home equity exemption in New York is $50,000, but $350,000 in Nevada.
However, when it comes to Chapter 7 bankruptcy, anything above the exemption might result in you and your home parting ways: “If you have property above what you’re allowed to keep, you might have to sell it,” says Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys and head of the Consumer Bankruptcy Assistance Project, which handles bankruptcy cases on a pro bono basis in Philadelphia. So if you’re in New York, and you have $100,000 equity in your home, you can keep only half of it. Chapter 13, which allows you to keep your home, might be a better choice if you’ve built up a lot of equity in your home and don’t want to be forced to sell.
Your credit will take a hit. Credit scoring experts estimate that a bankruptcy filing can reduce your credit score by as much as 300 points. Unlike other negative marks on your report that take seven years to clear (such as a charged-off account), a bankruptcy filing stays on your report for 10 years before it can be removed.
Waiting too long to file can hurt you. While there’s no exact formula for when to file, most experts agree that it should be prior to legal actions such as a car repossession or property foreclosure. A bankruptcy combined with repossession or foreclosure will mean that your credit will be in even worse shape.
“Because bankruptcy is so often portrayed as the option of last resort, people often wait way too long to consult an attorney,” says Gerri Detweiler, adviser for Credit.com, a credit information Website, and co-author of Stop Debt Collectors (Credit.com; $29.95). “In the meantime, they’ve drained their 401(k) to pay their debt. That doesn’t help solve the problem; it just leaves them with nothing.”
Alternatives to Bankruptcy
If you haven’t waited too long—meaning you’re not at the point where your wages are about to be garnished and your home is in foreclosure—there might be other options.
Work out a deal with creditors. With an increase in the number of people filing for bankruptcy, creditors might be more willing to work out a modification in your payment schedule.
Seek credit counseling. Go for one session with a not-for-profit credit counselor to get some advice. Nothing will appear on your credit report. Beware of fraudulent credit counselors. Choose a not-for-profit agency that is accredited by either the National