Some people may see bankruptcy as a quick fix that will make your debt magically disappear. While bankruptcy may discharge most of your debts, this decision comes with some serious, long-term consequences. I never advise someone to file bankruptcy when they have other options available such as cutting excess spending or selling items that aren’t necessary. Still, for many people, bankruptcy truly is the wisest way of dealing with overwhelming debt. Even if bankruptcy is best for you, you’ll want to be prepared for some of the consequences of filing.
The Negative
The most obvious negative impact of filing bankruptcy is that it lowers your credit score, which will hinder your ability to get credit in the future. There are things you can do to rebuild your credit, but you may need to start with a secured credit card with a high interest rate. You may be able to obtain a car loan, but be prepared to pay a high interest rate and large down payment.
In addition to a decreased credit score, the fact that you’ve filed will show on your credit report for 7-10 years. This not only negatively affects your credit, but could also interfere with a couple of important aspects of life. Some landlords will not rent to you if you have a bankruptcy on your record and some employers even use this information when making hiring decisions.
Bankruptcy can’t really be looked at as a free ticket out of all your debt. If you file a Chapter 7, most of your debt will be discharged, but this doesn’t include alimony, child support, and most student loans and taxes.
There is a chance you could lose property such as your car or home, but this generally does not happen. Before we make any big decisions, we’ll look at all the factors in your situation so you know exactly what to expect when you do file.
The Positive
After reading all the negative consequences of bankruptcy, you may wonder how anyone survives filing. There are actually many positive consequences to filing, the most obvious being the new start you’re given. The moment you file, the automatic stay goes into effect, and your creditors are no longer allowed to contact you to collect payments. If you file a Chapter 7, most of your debt will be gone, and if you choose a Chapter 13, your monthly payments will be greatly reduced and you’ll be on your way to being debt free. Even if all of your debts are not discharged through bankruptcy, getting rid of some of what you owe will free up room in your budget to make other payments and build up your savings account for emergencies.
If you’re filing bankruptcy, chances are that your credit score has already taken a big dip due to late and missed payments, so the extra damage caused by bankruptcy may not have much of an impact. If you make a strategic plan to use new credit, you can greatly improve your score fairly quickly. Many people end up with higher scores than they ever had before filing.
If you do happen to lose your car or home in your bankruptcy, this can be seen as an opportunity to make a new start without payments that you truly can’t afford.
Don’t Go It Alone
If you’re uncertain whether the negative consequences of filing bankruptcy are worth the benefits, give me a call so we can talk about your options. Together, we’ll work to get you headed toward financial freedom.