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It is too bad that the SATs no longer use analogies, because they make it so convenient to compare concepts across space and time. For instance, one could say that bankruptcy is to debt management in the same way that a thermonuclear weapon is to termite control. Bankruptcy is the most extreme of all extremes in the categories of personal finance, but in certain circumstances, it may be the best choice. You should consider declaring bankruptcy only under certain circumstances.
Once The Lesson Has Been Learned, Stop Teaching
The effect of bankruptcy on your credit health cannot be understated. If you are a visual learner, imagine dropping a bowling ball on a house of cards. Your credit score takes a swan dive down to a 300 FICO rating, the lowest rating on the spectrum. Declaring bankruptcy makes it virtually impossible to get a credit card, any type of loan, and sometimes even a job. If the message has not sunk in yet, here it is in plain type: anyone who declares bankruptcy needs to have a plan for their future. This plan must include how to build their credit score back up again and, most importantly, how not to make the same mistakes again. If you are the type of person who keeps sending checks to Nigerian princes, bankruptcy will do more harm to your finances than good.
Be Sure You Have What You Want
When you declare a bankruptcy, you either file for Chapter 7 or Chapter 13, depending on your property holdings. There’s nothing lucky about Chapter 7 even though Chapter 13 is about as unlucky as ten million black cat’s worth of negative luck. Chapter 7 requires you to liquidate assets (lawyer-speak for sell your stuff) except what you need for transportation and work. Chapter 13 allows you to keep a house or a car provided you have paid for it and still have an income. If you think bankruptcy is best for you, be prepared to watch a lot of your valuables get trucked out by repo agents.
Only Use It When You Need It
Bankruptcy should only be used as a debt management solution under explicit circumstances. A single source of debt like student loans or credit cards can be managed without resorting to bankruptcy, but a combination of debt from different factors may necessitate calling in the cavalry. Moderate debt (less than your annual income) alone is not enough to require bankruptcy but major financial burdens like children or medical bills may be the final nails in the coffin. Since taxes and student loans cannot be wiped out, furthermore, it may not be as effective as you would hope.
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