Consequences of Bankruptcy
The overriding principle of bankruptcy is that it gives you a fresh start with your finances. Chapter 7 (known as liquidation), wipes away debt by selling nearly all your possessions. Chapter 13 (known as the wage earner’s plan) gives you an opportunity to develop a 3-5 year plan to repay all your debt and keep what you have. Both equal a fresh start.
Yes, filing for bankruptcy impacts your credit score. Bankruptcy remains on your credit report for 7-10 years, depending upon which chapter of bankruptcy you file under. For example, Chapter 7 (the most common) is on your credit report for 10 years, while a Chapter 13 filing (second most common) is there for seven years.
During this time, a bankruptcy discharge could prevent you from obtaining new lines of credit and may even cause problems when you apply for jobs. If you are considering bankruptcy, your credit report and credit score probably are damaged already. Your credit report may not endure significantly more damage, especially if you consistently pay your bills after declaring bankruptcy.
Still, because of the long-term effects of bankruptcy, some experts believe it’s most beneficial when you have more than $15,000 in debts.
Where Bankruptcy Doesn’t Help
Bankruptcy does not necessarily erase all financial responsibilities. It does not discharge the following types of debts and obligations:
- Federal student loans
- Alimony and child support
- Debts that arise after bankruptcy is filed
- Some debts incurred in the six months prior to filing bankruptcy
- Taxes
- Loans obtained fraudulently
- Debts from personal injury while driving intoxicated
It also does not protect those who co-signed your debts. Your co-signer agreed to pay your loan if you didn’t or couldn’t pay. When you declare bankruptcy, your co-signer still may be legally obligated to pay all or part of your loan.
Other Options
Most people consider bankruptcy only after they pursue debt consolidation or debt settlement. These options can help you get your finances back on track and won’t negatively impact your credit as much as a bankruptcy.
Debt consolidation combines all your loans to help you make regular and timely payments on your debts. Debt settlement is a means of negotiating with your creditors to lower your balance. If successful, it directly reduces your debts.
To learn more about bankruptcy and other debt-relief options, seek advice from a local credit counselor or read the Federal Trade Commission’s informational pages.