- Bankruptcy provides the highest level of protection along with the most significant negative consequences of any form of debt relief.
- It may not eliminate all debts, and you could lose your property.
- Bankruptcy could affect your credit for up to 10 years and make it difficult to qualify for loans.
- Bankruptcy becomes part of your permanent record, and you must attest to filing indefinitely.
Filing bankruptcy is the option of last resort because of the adverse consequences. In many cases, other forms of debt relief allow you to get debt under control outside of bankruptcy.
However, there are times when filing bankruptcy is the best solution because of the legal protections offered. Before deciding to file bankruptcy, it inessential to understand the negative consequences associated with this form of debt relief.
Two Types of Consumer Bankruptcy
Consumer bankruptcy petitions fall into two categories, Chapter 7 or Chapter 13. Chapter 7 liquidates non-exempt assets rather than requiring payment to creditors. Chapter 13, on the other hand, requires you to repay a portion of what you owe for three or five years before qualifying for a discharge.
While bankruptcy can seem like a “get of jail free card,” there are downsides to consider before deciding if bankruptcy is the best alternative.
Immediate Effects of Bankruptcy
Loss of credit access: Lenders included in the bankruptcy petition automatically close accounts.
Negative Impact on Your Credit Score: The level of harm depends on the current state of your credit. In some cases, it could fall more than 200 points. Chapter 7 remains on your credit profile for 10 years, where a 13 stays for seven.
Credit bureaus include a notation on accounts contained in the petition. The notation is “included in the bankruptcy,”and then “discharged in bankruptcy,” when the case concludes. It remains for seven years from the last payment.
A Challenge to Qualify for A Loan: Lenders often have mandatory waiting periods before approving an application after bankruptcy. You also face mandatory waiting periods before you can refile a new petition.
You Could Lose Property: Depending on whether you file Chapter 7 or 13, you could forfeit property that does not qualify for an exemption. Bankruptcy allows you to keep exempt assets, including household goods, a low-valued vehicle, or small amounts of home equity.
Assets not qualifying for the exemptions are subject to bankruptcy rules. Chapter 7 typically demands the sale of non-exempt assets before a judge discharges debts. Chapter 13 permits you to keep more property provided you pay the associated loans and repay unsecured creditors at least what they would have received had you filed chapter 7.
May Not Eliminate All Your Debts: Not all debts qualify for a discharge. Owing support payments, such as child support or alimony, most tax debts, and student loans are a few bills bankruptcy is unlikely to eliminate.
Lose Tax Refunds: In most cases, you will lose your tax refund while under bankruptcy protection. Any monies received like refunds, bonuses, or inheritances become part of the bankruptcy estate.
Long-Term Effects of Bankruptcy
Forever Claim to Filing Bankruptcy. Anytime an application asks the bankruptcy question, you must attest to the filing.
The Stigma of Bankruptcy. You face the stigma of filing bankruptcy indefinitely because it becomes part of your permanent public record.
Limits Access to Certain Jobs. Bankruptcy will not affect mostjobs, and in most cases, an employer cannot consider bankruptcy during the hiring process. However, it can affect your ability to work in the financial industry and in jobs that require security clearances.
Should You File Bankruptcy
Before deciding to file bankruptcy, weigh the adverse consequences with the legal protections provided. There may be alternatives that offer similar benefits without the downsides of bankruptcy.
