How Bad Are Bankruptcies?
Declaring bankruptcy is a complex issue with both positive and negative impacts on your credit and financial status. In that case, is filing for bankruptcy a good idea?
Even though bankruptcy may help you get debt relief, there are impactful consequences to consider. We have compiled a list of possible negative outcomes so that you realize the severity of this decision. The more you know what comes with a bankruptcy case, the more qualified you are to make a decision.
What Is Chapter 7 Bankruptcy?
Declaring Chapter 7 bankruptcy or a “straight bankruptcy” is what people normally refer to when talking about this topic. While Chapter 13 refers to restructuring finances to repay debts, Chapter 7 refers to liquidating assets. The idea behind filing for bankruptcy is selling your assets, sometimes with the exceptions of cars, work-related tools, basic household furnishings, etc. The process will be supervised by a federal court trustee.
Is Chapter 7 bankruptcy bad? At first, it seems like a convenient way out of debt. Once your assets are sold, your creditors will receive money from the sale. This eliminates your debt balance and, thus, releases you from personal liability for certain specified types of debts.
However, bankruptcy will not cover some types of debt. For instance, you will still have to pay court-ordered alimony and child support, taxes, and student loans. And since it comes with other negative outcomes, it should only be considered as a last resort. Is it good to file bankruptcy before you exhaust all other options? Not if you want to save your property and have decent credit.
Realities of Filing for Bankruptcy
How bad are bankruptcies? Even though most people realize it is not something desirable, they can’t pinpoint its exact consequences. The point is not to scare you but bring awareness of how seriously you should take this step. Here are some things you need to take into account before starting bankruptcy procedures.
It Stays on Your Credit Report for Years
Even though the entire process of filing for bankruptcy only takes several months to half a year, you will be affected long after. Specifically, it will stay on your credit report for 7-10 years. Therefore, you need to account for the long future and not seek a quick fix.
Your Bankruptcy Will Become Public Knowledge
The consequences of filing personal bankruptcy will not be a private matter. Therefore, for the entire period of 7-10 years, anyone can access the record. It can be businesses, banks, clients, or even potential employers. While there is nothing to be ashamed of, you don’t necessarily want to have your name and other personal information made public.
Not All Debt Can Be Wiped Out in Bankruptcy
Bankruptcy courts have the authority to eliminate many types of unsecured debt. This includes medical bills and credit card balances. However, as has been said previously, certain debts will not be covered, such as student loans. Also, recent income tax bills (less than three years old) will not be eliminated.
Bankruptcy Still Costs Money
Bills associated with filing for bankruptcy sound counterproductive. However, the system is set up in a way that will add costs to the list of your expenses. Primarily, you will need to pay for legal representation. However, you should not underestimate the value of professional service.
Getting Approved for A Mortgage Will Be Hard
Another reason why bankruptcy is bad involves getting a mortgage loan. It is not always easy to be approved in a normal lending environment. When you add a bankruptcy record into the mix, it becomes an even tougher challenge. Also, if your score drops below 500, you will pay an approximately 6% higher interest rate.
Interest Rates and Fees for Credit Cards May Rise
Is filing bankruptcy bad to the point that you will not be able to get a credit card? Fortunately, no. Credit card companies realize that even the riskiest of borrowers is not a lost cause. However, it may come at a cost – for example, in the form of fees – until you repair your credit.
Missed Payments May Cost You Bankruptcy Protection
If you are uncertain about your financial situation or suspect you may miss a payment, remember that bankruptcy cases could be dismissed altogether. This would mean falling back into the position you started with. The liability for your debt will be restored.
When is it good to file bankruptcy? Certainly, this is not an easy question. Our biggest advice is to seek professional counseling. As you can see, bankruptcy is not something to take lightly, and you need an expert’s perspective to make the right choice. They will inform you about the risks and benefits, reasons to declare bankruptcy, and offer alternatives. Experts know when to file bankruptcy or not and whether you need to enroll in another type of debt relief program, such as debt consolidation.