Bankruptcy can seem like an easy solution to debt problems, but it isn’t without consequences. It is true that many of your debts may be “erased,” but there is a price to pay for that freedom. I always advise my clients to explore every possible alternative to bankruptcy, from cutting spending and simplifying their lifestyle to selling unnecessary property and negotiating with creditors. Sometimes bankruptcy truly is the best option, so it’s wise to familiarize yourself with some of the possible consequences you’ll deal with after filing.
The negative impact that most deters people from filing bankruptcy is the lowered credit score. This can be a real problem when you need to apply for a car or home loan. You can take action to rebuild your credit and improve your score, but this takes time. You may need to start with a small, secured credit card that you pay off completely each month. If you need to take out a car loan right after filing, you may have to provide a large down payment and pay a high interest rate, but after some time, you may be able to refinance for lower payments and better terms.
Having a bankruptcy show up on your credit report for 7-10 years can also be a burden. Some landlords refuse to rent to people who have a bankruptcy on their record, and some employers even require a clean credit report for job applicants.
Bankruptcy discharges most unsecured debts, but will not get rid of student loans and back taxes. You will also still be responsible for any alimony or child support that you’ve been ordered to pay; however, you may be able to have your payments modified based on your new financial situation. If you own a car or home, there is a possibility you could lose this property in a bankruptcy. Before this would ever happen, we’ll work together to take advantage of the many available exemptions to protect your property, and I’ll guide you as you make important financial decisions.
If you only look at the negative consequences, bankruptcy can be scary, but there are many positive benefits as well. If you’re behind on debts and have been receiving calls from creditors, filing bankruptcy begins the automatic stay and puts an end to those calls. If you file a Chapter 7, there’s a very strong possibility you could be debt free after filing, and if you file a Chapter 13, your monthly debt payments could be greatly reduced. Even if you have some non-dischargeable debt remaining after you file, discharging some debt may make your budget more manageable, and you could even begin to build up your emergency savings account.
Most people don’t file bankruptcy until they’ve fallen behind on debt, and at this point, their credit score has already taken a ding due to late or missed payments. Filing bankruptcy puts an end to late payments and starts your new road to financial security. With unmanageable debt gone, you can strategically use new credit and make timely payments; you may end up with the best credit score of your life after some time has passed.
While it can be sad to lose a home or car, this is also your chance to be free of debt that you truly can’t afford. You can then shop wisely and make your life less stressful with reasonable debt payments.