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 all other efforts to correct financial difficulties have failed. It is one of the most severe notations you can have on your credit history, although for some people who are facing overwhelming debt, it can be the best option. 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 and is just about the worst possible “bad mark” on your credit in the eyes of potential creditors. A Future credit grantors may interpret a Chapter 7 bankruptcy as a sign of both financial irresponsibility and a very high credit risk.
Chapter 13, while still harmful to your credit, is less damaging than a Chapter 7 and remains on your report for 7 years from the date of filing. 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.
In April of 2005, the Bankruptcy Prevention and Consumer Protection Act was passed into legislation, making it more difficult for individuals to receive a Chapter 7 discharge. Pre-filing credit counseling and post-filing financial education are now required. Additionally, the Supreme Court held that assets in an individual’s IRA account are exempt from withdrawal from the bankruptcy estate.
