If you are having financial trouble, then you may have considered filing for bankruptcy. Bankruptcy is considered a last resort option for people who are dealing with financial hardships. Declaring bankruptcy allows you to reset your finances and potentially get a clean slate. Still, there are many negative consequences to filing for bankruptcy, including making it difficult to get approved for credit for many years.

What happens when you file for Bankruptcy?

There are two types of bankruptcy, Chapter 7 and Chapter 13. Chapter 7 bankruptcy is usually called liquidation bankruptcy because you will likely have to sell off some of your assets to pay down your debt. State laws determine which assets are exempt from liquidation, which usually includes your house, car, and retirement accounts. Chapter 13 bankruptcy allows you to keep your assets, and instead, the debts would be organized so you could pay them off over the next couple of years.

When you declare bankruptcy, you are telling all your debtors that you cannot pay the debts you agreed upon. This will damage your credit history. Chapter 7 bankruptcy completely erases your debts, but it will stay on your file for up to 10 years. Chapter 13 bankruptcy, on the other hand, is not ideal from a credit standpoint, but it is viewed more favorably than Chapter 7 because you are still paying off some of your debt. Chapter 13 will remain on your credit report for seven years.

Immediately after bankruptcy, it can be very difficult to obtain new credit with decent terms. However, some lenders work directly with people who have gone to bankruptcy or have other financial difficulties, so you will still have some options. As you develop better credit habits post-bankruptcy, your credit score will recover over time even while the bankruptcy is there.

Filing for bankruptcy is a serious financial step, but it can be the best step if you need to recover your finances and start with a clean slate. With two types of bankruptcy, it’s important to pick the one that best suits your needs so you can start recovering your credit and your finances as soon as possible.