|Different Types of Bankruptcy
Bankruptcy is a legal procedure that provides debt relief to consumers who
cannot pay their bills. The decision to file for bankruptcy is a serious
step, and is usually taken when other efforts to correct financial difficulties
have failed. It is one of the most severe notations you can have on your
credit report. Most consumers who declare bankruptcy do so under Chapter
13 or Chapter 7 of the U.S. Bankruptcy Code.
Chapter 7 is a complete relief bankruptcy, meaning that the debtor is released
from all repayment responsibility for the accounts included in the bankruptcy.
That complete relief comes at a high price, however: Chapter 7 bankruptcy
remains on a credit report for 10 years from the date of filing. That's
three more years than most negative information, in addition to being one
of the worst marks on your credit in the eyes of potential creditors. A
Chapter 7 bankruptcy can be the only way out for people who are deeply in
debt, but future credit grantors may interpret it as a sign of both financial
irresponsibility and a very high credit risk. If you bailed out once, they
may reason, what's to stop you from doing so again?
Chapter 13, while still harmful to your credit, is less damaging than a
Chapter 7 and remains on your report for fewer years. Chapter 13 is a repayment-plan
bankruptcy, in which you agree to repay your debts - or at least a portion
thereof - according to terms approved by the court. In addition, your assets
are not sold to repay creditors as they would be in Chapter 7. A Chapter
13 bankruptcy remains on a credit report for seven years from the filing