Bankruptcy – Last Resort – Episode #97
A consumer asked “when should I know it’s time to declare bankruptcy?” This user was thinking that they were behind enough in payments to just want to start fresh and declare bankruptcy. Bankruptcy should be thought of as a last resort and not a “reset” button.
When Bankruptcy is Right For Your Credit
There are 3 stages in my eyes, do-it-yourself, credit counseling and then bankruptcy. Here are the guidelines I use to figure out what kind of help you need.
- Can you make minimum payments on your debt?
- Yes. Then you should try to institute a do-it-yourself plan. Just by paying more than the minimums you can really cut down on the amount of time it will take you to get out of debt.
- While this may take months or years to pay down your debt, it’s still better than bankruptcy. Set up a budget and remove all the unnecessary expenses? Start with the cable/satellite service. Cancel that. Getting your hair cut once a month or colored once every 3 months? Extend it out a month and apply the difference to your credit cards.
- No. If you know you cannot make minimum payments on your debt after including living expenses then it’s time to consider credit counseling.
- Not all credit counselors are alike. Plus, non-profits are not always the best choice. Best is to use our credit counseling search which only returns Dept of Justice approved agencies. Avoid any company touting credit repair services.
- Credit counselors will charge you a small setup fee and a small monthly fee and help you setup a debt management plan and will work with creditors to settle your debts.
- Let the credit counselor assist you in the decision on whether it is time to declare bankruptcy.
- Yes. Then you should try to institute a do-it-yourself plan. Just by paying more than the minimums you can really cut down on the amount of time it will take you to get out of debt.
Remember, a bankruptcy stays on your credit report for 10 years in most cases. Compare that to the impact of most credit items staying on your report for 7 years, and the simple math says a bankruptcy is 30% more damaging. Good credit scores start with your education on how the credit system works. Be sure to check out our Credit Score 101 lesson, and the Credit Score Factors lesson to get started.
Similar Posts:
- Bankruptcy – Last Resort – Episode #97
- Credit Score Resolutions 2009 – Episode #100
- How Much Will A Foreclosure Impact My FICO Credit Score? – Episode #49
- Higher FICO Credit Scores – Lesson #6
- Loan Modification vs. Loan Modi “fiction” – Episode #94
- How Can I Find a Credit Counselor I Can Trust? – Episode #34
What are the chances of getting a principle reducting if we tell the lender that we won’t be reaffirming the mortgage when we file bankruptcy, unless they can help us? We are underwater by about $200,000. (Also if we were to foreclose instead of do a bankruptcy, would the second mortgage still drop off?) (We are in FL)
One loan modification program available in which lenders reduce principal is FHA’s Hope For Homeowners. There is lots of discussion on banks reducing principle, but I haven’t seen this shift. Banks want there money and most loan modification programs have had little participation and even less success in slowing foreclosures. This gives the banks a lot of pause from helping people with their principle. Re: the second question. All mortgages tied to a foreclosure will reflect the foreclosure. They will fall off your report in 7 years if foreclose and 10 years if you file a bankruptcy.