Personal insolvency can be declared by any person that finds himself unable to pay off his debts or part of his debts through other means - in short, when a financial situation has become unsolvable with no realistic hope of improvement in sight. When declaring bankruptcy a person has the possibility to choose between filing for chapter 7 or chapter 13 bankruptcies. Both these methods are extreme and they will stay on the person?s credit history for a very long time, making it very difficult to apply for large loans or mortgages. Even though you can find lenders willing to lend you money after you declared insolvency, you will have to pay higher interest rates and fees and you may not be allowed to ask for a large sum of money.
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Because chapter 7 bankruptcy implies that a person is obliged to put at the disposal of his lenders all the assets and properties so that they can recover the money they borrowed, most people prefer filing for chapter 13 insolvency. Depending on the total sum of money that a person owes and the financial recovery possibilities, chapter 7 can sometimes mean losing a valuable asset such as a home or car. In addition, before the authorities of any state accept a chapter 7 insolvency petition, a person must pass a federal means test to prove that he or she is unable to pay his debts.
On the other hand, when filing for chapter 13 a debtor practically agrees to a payment plan with his lenders and allows the legal authorities to keep a close eye on the way that person handles his finances. However, in most cases, these people get to keep their house, car, boat or any collateral that they agreed to in the loan. Even though you are following a strict payment plan, the bankruptcy will be declared to all money lending agencies and it will affect your credit score in a negative way.
Alternatively, you can first file for chapter 7 insolvency until you get back on track and, after a few years, file for chapter 13. The decision whether you should choose a certain type of bankruptcy should first be discussed for each situation with a professional. With the help of a lawyer or money expert, you can also discover other solutions that work for your financial needs and that have a less negative impact on your credit score.
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