For many consumers the thought of having to file bankruptcy can cause quite a bit of anxiety. The fact is however that, even though here at this blog we believe that everyone has a moral obligation to repay their debts, in some cases bankruptcy might be the only course of action that’s available.
If that’s the course you choose however, you should definitely know that there are some significant drawbacks, including the fact that bankruptcy will follow you around, at least as far as your credit goes, for quite a bit of time. For the exact number, and more facts that you really need to consider before filing for bankruptcy, keep reading below. Enjoy.
First, like we said, your credit records will reflect your bankruptcy for a long time, 10 years at least, during which time it will be extremely difficult for you to get any sort of credit. New credit cards, a loan for an automobile or a mortgage will probably be out of the question completely, as well as most other forms of credit.
Also, keep in mind that filing for bankruptcy isn’t free. There are attorney fees, court filing fees and other costs that could run in the hundreds of dollars easily, and possibly in the thousands. These fees must usually be paid up front as well, before any relief from your creditors is given.
Bankruptcy laws have also gotten a lot more strict in the last few years also, and it’s possible that you won’t get complete relief from all of your debts using bankruptcy.
Also, do you have equity invested into your home? Sometimes people find themselves in an immediate pinch for cash. Rest assured, there are other options than filing bankruptcy too soon. When in need of a loan, one can always leverage the equity of their home. It is important to become familiarized with a home equity line of credit.
Personal bankruptcy comes in two flavors, if you will. There’s Chapter 7 and also Chapter 13. Chapter 7 is what they call “straight bankruptcy” and this allows you to discharge practically all of your debts. Child support, loans obtained through false financial statements, taxes and alimony are not discharged however, as well a student loans, any loans that aren’t listed in the bankruptcy petition and legal judgments against the petitioner.
Also, even though Chapter 7 will relieve you of repaying most of your creditors, it’s quite possible that you will have to surrender most of your property in order to satisfy the debts that you all. Laws differ from state to state and some may grant you exemptions on certain types of property, including the amount of equity you have in your home, an automobile that has low value, tools that you use for your business or trade as well as small amounts of jewelry and some items of personal property.
Most of these exemptions aren’t very large but having them means that you won’t have to start again completely “from scratch”.
The other flavor of bankruptcy is Chapter 13, which is oftentimes referred to as the “wager-earner plan”. When you file Chapter 13 the control of your finances is surrendered to the bankruptcy court but you keep all of your property. A repayment plan, based on the financial resources that you have the time, must be approved by the court, and in most cases all (or sometimes only part) of your debt will need to be repaid over the next 3 to 5 years.
During that 3 to 5 year period creditors are prohibited from harassing you for any type of repayment on your debts and you won’t incur any interest charges on those debts. Once you’ve paid off everything based on the payment plan approved by the court, your bankruptcy is considered completed and you will be debt-free.
And there you have it. Everything you always wanted to know about filing bankruptcy, but were afraid to ask. If bankruptcy is something that you see as inevitable due to your financial situation, you now have the information you need to make some important decisions.