There are a few things that can hurt your credit score. These include making late payments, defaulting on a loan and even bankruptcy. None of these occurrences are good for your credit, so it's important to educate yourself about how to steer clear of them and keep your credit score from venturing into negative territory. One of these negative marks is bankruptcy. Not only will this process hurt your credit score, but it will have major impacts on your finances. By understanding how the different types of bankruptcy work, you will be able to make better financial decisions to avoid them:
What is bankruptcy
Bankruptcy is a legal procedure you can file for when you are unable to pay back your debts. The most important thing to remember is that this is not a get out of jail free card. It is a very serious procedure that will have drastic repercussions on your credit report, score and the overall state of your finances. Bankruptcy tends to be a last resort, so you want to try to stay away from it.
This type of bankruptcy is referred to as liquidation. The process involves a trustee taking over all of your assets, estimating their cash value and distributing these funds to creditors. In order to qualify for this, you must pass the means test. If your income is less than the median of the state, you will then qualify.
Chapter 9 and 11
These two types allow debts to be reorganized, but they are slightly different. Chapter 9, or Adjustment of Debts of a Municipality, is when a city, town or county reorganizes their debt. Chapter 11, which is simply referred to as reorganization, is usually done by a business to restructure their debt and stay in business.
Some types of bankruptcy are geared more to a specific group such as Chapter 12, or Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income. If you are a professional in this group, you can create a plan to pay back your debts, usually over a three year period.
If you do not meet the standards of the means test, you must file for Adjustment of Debts of an Individual With Regular Income. Like Chapter 12, this bankruptcy sets up a schedule for you to pay creditors back, generally over three to five years.