Bankruptcy is a legal declaration stating that you cannot pay your debts. This declaration is designed to be a starting point for a new, clean and clear financial situation for the filer.
Filing for bankruptcy gives you the opportunity to delete the financial burden of most, if not all, of your debts. Bankruptcy allows you to pay off the debts that remain under the protection of bankruptcy’s rules and regulations. Any repayments that your bankruptcy settlement requires you to continue to pay will be within your means and without the harassment of creditors, relieving you of the stress and pressure of trying to meet the demands of bills and payments that are beyond your ability to pay.
Although the goals and advantages of filing bankruptcy are very appealing to anyone struggling with debt, there are consequences and repercussions for filing bankruptcy that can be difficult for many people to face. Because of these consequences and long- and short-term effects of filing bankruptcy, any credit counselor, lawyer, financial advisor, or self-help book is going to tell you rightly to make sure that bankruptcy is your last resort when trying to get yourself out of debt.
In addition to the debt relief, the most obvious consequence of resorting to bankruptcy to get out of debt is bankruptcy’s impact on your credit score. When you file for bankruptcy, expect that filing to stay on your financial records for between seven and ten years, leaving a large, negative effect on your credit.
The poor credit rating caused by bankruptcy can make getting a mortgage or a loan a very difficult task because you are perceived as a risk. If you have failed to pay debts in the past, creditors see you as a risk for not paying your potential creditors in the future. In order to get a home loan, for example, you can expect to have to wait at least two years after your bankruptcy was finalized before a lender will be willing to consider providing you with a loan. Until you rebuild some of your credit, convincing creditors that you are not a risk will be a difficult task.
Directly after your bankruptcy, you will not have any credit and, when you do regain credit, you will most likely have higher interest rates than before you filed or than you would have if you had not gone through a bankruptcy. Interest rates are determined by a number of factors, but one of those influential factors is how much of a risk you pose to the creditor. If the creditor is concerned about whether or not you will pay back the total amount you are borrowing, based on your financial history, you will have a much higher interest rate than someone who has excellent, consistent financial records.
Of course, one of the most dramatic consequences of bankruptcy is that you will likely lose some of your possessions and assets. Your assets – the property you own that is not exempt under the relevant bankruptcy laws – will be sold and distributed to your creditors to pay as much of your debts as the courts deem possible. If you are at risk of foreclosure or repossession, this consequence may not seem as dramatic as watching your property being removed without feeling the relief that bankruptcy offers. However, reconciling yourself with the possibility of losing property is an important step when choosing to file bankruptcy.
These negative effects, however, are not the end of the world as your finances know it, nor are the effects permanent. As long as you make your payments on time and stay on top of your efforts to improve your debt-to-income ratio, you can start improving your credit as soon as you have found your way to the other side of your bankruptcy. With dedication and a little time, you can rebuild your credit, improve your standing with potential creditors, and live a life relatively free of the burdens of a past bankruptcy.
Many individuals and businesses have found themselves in a position in which bankruptcy is their best choice. Most of these people and organizations recover from bankruptcy and manage to move on with their lives and their finances without the permanent hindrances they fear.
Obviously, there are very significant pros and cons to filing for bankruptcy, so making the decision about whether or not to file can be a very difficult choice. Once the decision is made, you still have to deal with the consequences of that choice, so there is a trying process involved either way. Take your time and really consider the potential offered by each choice.
The way I feel about bankruptcy is that if you are in such dire need to reduce your debt, filing for bankruptcy might be a better choice than signing up with one of those debt consolidation programs or taking out a bad credit loan.
Related Posts: