Like anything in life, bankruptcy is neither all good nor all bad. However, it is a good idea to weight these bad and good aspects before making a decision. Take a look at bankruptcy’s benefits as well as the harsh reality of bankruptcy’s consequences.
The silver lining of filing bankruptcy
Here are some of the positives that bankruptcy can do for you:
You get a fresh start. The collection activity stops. The fees and penalty rates stop. In fact, in a Chapter 7 bankruptcy, virtually your entire debt may go away. Without the ability to put a stop to the madness of credit gone awry, some people would never be able to live a normal life again. Bankruptcy can enable that to happen.
You get credit education. The bankruptcy law says that anyone who files is required to get some credit education. This is an opportunity to look back at what happened and reset your financial and credit course going forward. If you take full advantage of this opportunity, you’ll walk away with a much better sense of how to manage your financial life.
The darker side of filing bankruptcy
As you can probably guess, filing bankruptcy comes with some pretty heavy consequences, too. Here are the major ones:
You may still owe money. Bankruptcy may not wipe out all your debt. Some debts don’t go away, even though you’d like them to, and you must pay them in full. The debts that don’t disappear are
Federal, state, and local taxes
Child support
Alimony
Student loans (except in very limited circumstances)
Money owed as a result of drunk driving and other criminal offenses, such as willful injury or damage to people and property
Your credit score will be affected for years. Bankruptcy is a major negative on your credit report that appears as a public record in your file and your account history for up to ten years. Worse, it causes your credit score to stay depressed longer than a normal delinquency does. Declare bankruptcy and you’re likely to see your score drop to the lowest 20 percent of all credit scores.
Borrowing money becomes more difficult. When lenders see a score in the lowest percentile, your interest rates and terms escalate. In a tight credit market, lenders may decline to give you credit at any price.
Some lenders specialize in loaning to people with bad credit. They’re delighted to see you; the fact that you’ve just gone bankrupt is a big plus in their eyes. Why? Because under the law, you can’t file a Chapter 7 bankruptcy again for eight long years. So although lenders get to charge you high interest rates as a risky borrower, you can’t avoid repaying them by playing the bankruptcy card.
If you fall behind, you can run, but you can’t hide. These lenders are very good at collecting overdue accounts. The bottom line: Avoid these lenders at all costs. If you must borrow shortly after a bankruptcy, use a reputable lender.
Renting an apartment may become more complicated. Many landlords use credit reports to approve tenant applicants. They may refuse to rent to you, require a cosigner, or demand a larger deposit if they see a bankruptcy.
Insurance costs rise. A bankruptcy may cost you more in insurance premiums, particularly for homeowner’s and auto insurance. The insurance mavens love credit reports. All those dispassionate numbers lend themselves to justifying rate increases much more than real claims do. So even if you have no claims, expect your premiums to go up. Some states don’t allow credit to be a factor in setting rates, but most do.
Employment searches may be more difficult. Even under ideal circumstances, job hunting is extremely competitive and can be very stressful. When you consider the fact that many employers run a credit check before making a job offer, your stress level can increase as your opportunities decrease. As a practical matter, some licenses can’t be given to people who’ve filed for bankruptcy, and security clearances can be denied.
The events, behavior, or judgments that resulted in your bankruptcy are concerns for prospective employers. They are the silent killers, because although you can’t legally be denied employment because you filed a bankruptcy, a prospective employer rarely asks questions to find out the reasons. Going on to the next candidate is easier and legally safer.
Your self-image and confidence may suffer. Bankruptcy can take its toll, because like it or not, a great deal of the way many people view themselves is wrapped up in their financial persona.
Most people think of themselves as responsible adults, and they’ve been taught that responsible adults pay their bills and keep their promises. Even though you know that filing for bankruptcy is okay and that you have no choice in the matter, you may find that you have an unexpected internal conflict to deal with.
