Bankruptcy is a federal court procedure that provides a second chance for individuals or businesses who find themselves unable to pay off their financial debts. Financial assets and liabilities are brought before the court so that a judge can determine whether or not to discharge the debt due to an inability to repay the accounts now or in the near future.
While bankruptcy may offer you a way to clear their debt, is it not without its consequences and should be entered into only after careful consideration. Here are 4 ways bankruptcy may affect your future:
Debt Forgiveness Does Not Apply to All Debt
There are several bankruptcy options, so you will want to learn about each type to determine which one will best suit your needs. Bankruptcy is well-known for eliminating credit card and other unsecured debt as well as putting a stop to collection attempts from creditors. Depending on the type of bankruptcy you file, however, most student loans and tax debt will not be included in the discharge. In most cases, payments such as alimony and child support will not be rescinded.
Bankruptcy Will Harm Your Credit
Depending on the type of bankruptcy you file, it will remain on your credit report for 7 to 10 years. As a result, your credit score may suffer a loss of 200 points or more. This decreased credit score may make securing a loan in the future more challenging and more expensive. A low credit score can also affect your ability to rent an apartment or get a credit card with a good interest rate. That being said, after a bankruptcy, there are steps you can take to ensure that your credit score can recover in as little as 4 to 5 years.
You Could Lose Property
While a Chapter 7 bankruptcy allows debt cancellation without repayment, you may be required to relinquish property that is not deemed exempt according to the laws of your state. The courts may require that some of your property is sold and used toward debt repayment. Retirement accounts, home equity, your vehicle, and some personal property are usually protected. On the other hand, Chapter 13 bankruptcy provides protection for some additional property and assets.
A Lack of Privacy
Filing for bankruptcy means that your name and other personal information is made part of the public record. As a result, banks, businesses, clients, and prospective employers have access to any information you filed with the court. For most, the benefits of a fresh start outweigh the risks, but information security may be an issue for some.
While bankruptcy is an option that provides freedom from past debt, one must carefully consider the ramifications it has with regard to future finances. Considering that each situation is unique, you should consult with a lawyer who has experience with bankruptcy before you make any decisions. They can go over the different kinds of bankruptcy, the specific rules of your state, and help you find the best options for you and your family.