Bankruptcy is a legal way of dealing with your excessive debts which are beyond your capacity to pay, but it should always be your last option. Some take the opportunity of declaring bankruptcy earlier than expected to get rid of their debts immediately. However, this may have the opposite effect.

You should know that bankruptcy will take its toll on your financial life. Before you take this course of action, you should consider all other possible options and talk it over with your lawyer. So what makes bankruptcy so bad?

Declaring Chapter 7 bankruptcy, which can minimize or eliminate your debts, is your final admission of financial crisis. Once you’ve done this, your credit will suffer quite a bit. Your credit record will show a record of your bankruptcy for the next ten years, which can harm your credit rating and make it harder to get loans for housing, automobiles, and other necessities.

Although getting your credit back in good shape isn’t impossible, you may end up having to pay higher interest rates for the meantime. Banks and other lending agencies will always see you as a high-risk client, so you’ll have to deal with this, too.

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When you apply for a modification with your lender, you will be asked to supply certain loan modification forms. All lenders require the same basic information from a homeowner and this information is reviewed to determine your eligibility. Here is a list of the basic forms and just what is required on each one.

1. Borrowers Statement: This is your basic information like name, birth date, social security number, employment information. You also show any co-borrower information here, and list your dependents. This form tells the bank how long you have been on your job, if your spouse works and how many people live in your home.
2. Hardship Letter-Affidavit of Hardship: A brief description of your current financial situation and what has happened to cause the current mortgage payment to become unaffordable. This is your opportunity to explain your circumstances to your bank and gain their empathy. There are 3 critical parts to an effective letter, make sure you cover them all.
3. Financial Statement: The most important part of your application, this form really determines whether you will qualify for a loan modification or not. This is where you detail your income, expenses, assets-a basic snapshot of your financial situation. It is critical to work on this before you call your lender. Why? Because you need time to make any adjustments to your monthly budget so that you can meet the debt ratio and disposable income requirements. Learn about how to prepare you budget correctly in a handbook for homeowners.

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