| Understanding The Consequences Of A Bankruptcy |
| Written by Jonathan Green | |||
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Bankruptcy allows distressed debtors to discharge their debts, allowing them to get their financial lives in order. Using this escape hatch has consequences, however, and shouldn't be undertaken lightly. As the economy continues to falter, its estimated that an increasing number of people will file for bankruptcy. In 2009, more than 1.4 million people filed for bankruptcy, the highest number of filings since new laws restricted bankruptcy in 2005, and that number will likely be exceeded this year. When a person files for bankruptcy, the filer admits he or she can't cover their debts, and requires help to discharge them. Because filers have revealed themselves to be poor credit risks, their ability to get loans in the future may be impaired. This is not a permanent condition, however, and while initially harsh, the credit restrictions created by a bankruptcy can and do taper off over time. Credit recordOne of the main consequences of bankruptcy is that it negatively impacts your credit history and score for several years after the proceeding. On average, a bankruptcy filing will result in a 100-200 point deduction from your credit score. The real world result of this is that it will be harder for you to obtain credit, and even if you can get a credit card or loan, it may be at much higher interest rates that those offered to folks who don't have a bankruptcy on their record.A bankruptcy will sit on your credit history for 10 years. The impact of a bankruptcy on your credit history can be mitigated somewhat by rebuilding your credit by taking out and repaying loans and credit card accounts after bankruptcy. Undischarged debtsWhile bankruptcy can help get rid of credit card and medical bills, along with other types of consumer debt, there are some debts it won't help discharge. These debts include child support payments, criminal restitution, student loans and spousal support obligations. Before filing for bankruptcy, see what impact it will have on your total debt scenario. In some cases, the costs and consequences associated with bankruptcy are not beneficial to individuals with certain types of debt.RepaymentNew federal laws make it tougher to get a Chapter 7 bankruptcy, and force more individuals into a Chapter 13 bankruptcy. A Chapter 7 bankruptcy will more or less wipe out your debts, while a Chapter 13 bankruptcy forces you to make payments on it for three to five years before discharging the remaining amount. It may actually be preferable to deal with your debts with a debt consolidation rather than a Chapter 13 bankruptcy.EmploymentThe bankruptcy code prevents employers from terminating or refusing to consider you for a job based on a bankruptcy. However, employers are allowed to consider your credit and financial history, and if you're filing for bankruptcy, it's likely that you have other problems. When considering filing for bankruptcy, you should consider its potential to impact your ability to get a job at firms that conduct credit checks as part of their background search.HousingOne common worry of folks filing for bankruptcy is that they will be unable to obtain a home loan later, or if they do get one, it will be at sky-high interest rates. While it may be initially hard for you to obtain a home loan after filing bankruptcy. Over time your credit will recover and you will be able to get a home loan at a favorable rate. According to experts, 18 months to two years after bankruptcy most people can apply for and obtain a home loan at the same interest rates as people who don't have a bankruptcy on their record.Credit cardsIf you've had to file for bankruptcy, you may want to think twice before getting a credit card. Many bankruptcies are caused by unmanageable credit card debt, and there's no point in filing bankruptcy to absolve your debts, only to get back into trouble again because you're repeating the same bad borrowing habits that led to your first financial downfall.However, if you feel that you can manage debt, and wish to rebuild your credit, you can obtain a credit card after bankruptcy. The interest rate will be higher -- in many cases much higher -- than that of credit cards issued to folks who haven't filed for bankruptcy. One option you may want to consider is a secured credit card. A secured credit card requires you to put down a deposit equivalent to the credit limit. For example, if you're getting a secured credit card with a $500 limit, you'll be required to put down a $500 deposit. Over time, as you use the card responsibly, the bank may raise the credit limit without raising the deposit amount. Using a secured credit card judiciously is a great way to rebuild credit after a bankruptcy. While bankruptcy has consequences, it can be a good way to get a clean financial slate if you've gotten yourself hopelessly deep in debt. The consequences may also be mitigated with shrewd money management after bankruptcy has been filed and debts have been discharged.
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