Tough financial times are hitting most Americans, and they’re struggling to pay off mounting debt. When this happens, it’s not uncommon for people to turn to bankruptcy as an option. However, it’s important to understand that filing for bankruptcy isn’t the best choice for everyone. Filing for bankruptcy can have a number of negative consequences that are worth considering before making a decision.
The Downside of Filing for Bankruptcy
The primary downside to filing for bankruptcy is that it can create a negative remark on your credit report. This can hurt your chances of getting a loan or credit card in the future, and it will stay on your report for 7 to 10 years.
It can also make it harder to rent an apartment or get a mortgage. Many properties that are handled by property management companies will not let you rent an apartment or take out a mortgage for a year or two after your bankruptcy case is filed.
When you file for bankruptcy, your creditors are unable to pursue collection efforts against you. This is known as the automatic stay. It can help to put a stop to lawsuits, wage garnishment and debt collection actions.
Despite its potential disadvantages, filing for bankruptcy is often the only option that many individuals have when they are overwhelmed with debt. Before deciding to file, it’s a good idea to speak with a reputable credit counselor or attorney and consider your options.
Some debts aren’t discharged: This may be especially true for student loans, recent taxes and child support. This can give you the breathing room you need to pay off what remains of your debts, but it does mean that bankruptcy won’t eliminate all of your debt.
You can’t keep all of your assets: This is true with both Chapter 7 and Chapter 13 bankruptcy. Depending on your state’s laws, you can lose some or all of your non-exempt assets, including the equity in a home, investments and luxury items like vacation homes and second cars.
Your credit score will drop: This is a big disadvantage, because it can be difficult to rebuild your credit after bankruptcy. This is especially true for people who are struggling to pay off their debts and have been in a poor budgeting habit.
It can be difficult to open a bank account after bankruptcy: This is another issue that can have a negative impact on your financial stability. It’s not unusual for banks to close the accounts of someone who files for bankruptcy, and they typically have a strict setoff rule that requires you to have an account open before opening another one.
This can make it tough to secure a job after bankruptcy, and it can also affect your career path. Your employer will be able to see that you’ve filed for bankruptcy and might view you less favorably.
If you decide to file for bankruptcy, it’s a good idea to consult with a reputable credit counselor and try to negotiate with your creditors. If you’re able to do this, the positive impact of bankruptcy will likely outweigh its negatives.