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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 date.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
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