Sometimes, people accumulate more debt than they can repay. If their financial situation continues to worsen, declaring bankruptcy may be their only viable solution. However, this decision should be carefully considered since it can often create more problems and inconveniences than it solves. So, what are the consequences of bankruptcies, and what happens if you decide to eliminate all your debts?
How Does Filing for Bankruptcy Affect You?
Bankruptcy is a legal process that can assist you in managing overwhelming debt, but it can also lead to significant problems that impact your life. Therefore, it is essential to explore both the pros and cons of bankruptcy.
If you have always had a good credit score and enjoyed the benefits it brings, bankruptcy consequences can divide your life into “before” and “after.” Although the bankruptcy code protects you from discrimination from the employer, getting loans on favorable terms and renting an apartment will be more complicated.
Consequences of Bankruptcy
While bankruptcies can be beneficial in eliminating unsecured debt, they are not without drawbacks. It is essential to understand the consequences of the bankruptcy process before applying. Therefore, take note of the following factors you may encounter after the bankruptcy ends.
Credit Score Drop
Another consequence of bankruptcy is a drop in credit scores. A credit score shows how likely you are to repay the debt, and bankruptcies are an indicator of your inability to repay creditors. Therefore, bankruptcies lower your credit and remain on your report for up to 10 years.
Fewer Chances of Getting Loans
Lenders primarily pay attention to your credit report, so bankruptcy makes borrowing money much more complicated for you, as you look like a high-risk borrower. Therefore, it is essential to start rebuilding your credit history. For example, you can apply for credit-builder loans and make regular monthly payments to improve your credit.
No Tax Refund
One of the consequences of bankruptcy you can face is that your tax return may be transferred to your bankruptcy trustee to cover your outstanding debts.
Asset Loss
Although bankruptcy helps postpone your car repossession and protect your exempt property, there is still a high risk of losing your assets. For example, in Chapter 13, you are returning your previously unmanageable debt according to the repayment plan, but if you miss your payments, you can lose equity in your primary residence. In Chapter 7, you will lose your non-exempt assets in any case.
How to Find Bankruptcy Loans?
Since bankruptcy is a matter of public record, obtaining loans can be complicated if you have gone through Chapter 13 or Chapter 7. Bankruptcy damages your credit, making creditors reluctant to approve your applications. If bankruptcy occurs, you need to find a creditor who will tolerate your financial history. With the help of such lenders, getting a bankruptcy loan is still possible. There are several options that help people to get approved despite their credit and even get affordable interest. Below, you can see the main tips for getting approved after bankruptcy.
Apply with a Co-signer
Your chances of getting loans are higher when you have a person with good credit and a stable income. Co-signers take responsibility for repaying the debt, which is safer for creditors.
Find a Credit Counselor
Seeking loan opportunities is more accessible when cooperating with somebody specializing in this area. With the credit counselor’s assistance, you can understand bankruptcy basics and find a suitable loan option.
Compare Different Offers
Compare offers from different lenders to get the funds on the most favorable terms. Don’t sign a contract with the creditor if it does not satisfy you.
How to Get a Mortgage Loan After Bankruptcy?
Bankruptcy filings make applying for secured debt more challenging. If you have been planning to purchase a property, you may face various difficulties.
Many lenders can reject your mortgage loan application for two years from the moment bankruptcy appears on your credit file. If buying a home is necessary, and you can’t wait so long, financial institutions can approve your request if you have a co-signer or may need to pay high-interest rates and fees.
Ensure you can cover them and always make on-time mortgage payments. Otherwise, you can damage your credit even more.
How to Get a Credit Card After You File for Bankruptcy?
While the bankruptcy code protects employees from discrimination by their employers, obtaining a new credit card after bankruptcy can be challenging. Lenders cannot be sure you will repay the debt and will likely refuse you.
Alternatively, they can offer you a secured credit card that requires a deposit payment before opening an account. It protects a credit card issuer from your non-repayment of the debt and, at the same time, allows you to rebuild your credit by making regular monthly payments.
Which Debts Are Not Discharged by Bankruptcy?
Although both Chapter 13 and Chapter 7 provide financial relief, not all debts will be discharged. There are several types of debt you cannot get rid of:
- Child support;
- Federal student loan;
- Court penalties and fines;
- Debts incurred through illegal activity;
- Government fines and penalties;
- Alimony;
- Most tax debts.
Pros of Filing Bankruptcy
Filing for bankruptcy can be the only solution in certain circumstances. Discover the main advantages of this legal action to see the entire picture of profits you will get from a bankruptcy petition.
1. Fresh start
Bankruptcy proceedings can serve as an excellent start to a new page of your financial life. You can rebuild your credit and implement positive habits in your daily routine.
2. Increase in your credit
Although it may sound paradoxical, bankruptcy can improve your credit score. This is particularly beneficial for individuals with bad credit. After they discharge the debt, their credit utilization ratio will decrease, and their credit score will rise.
3. Autonomic stay
An autonomic stay protects you from creditors and doesn’t allow them to require payments until your bankruptcy is discharged.
4. Debt relief
After you file for bankruptcy, you no longer need to pay the creditors, which allows you to start a new life.
5. Getting a court-appointed trustee
You do not need to deal with the bankruptcy proceedings alone. A trustee will operate on your behalf during the whole process, helping you communicate with lenders and process your payments.
Cons of Filing Bankruptcy
Despite several profits, filing for bankruptcy has many negative sides. Carefully analyze them before applying.
1. Losing your assets
Bankruptcy proceedings often mean losing your car, home, and other assets to repay your debt. Ensure you agree to lose everything to pay to your creditor.
2. Bankruptcy expenses
If you decide to file for bankruptcy, consider all the costs you will face, such as service and court fees. Depending on the type of bankruptcy, you may pay between $1,000 and $4,000. It is important to be prepared for these expenses.
3. Not all types of debt are discharged
Before filing for bankruptcy, make sure that your specific type of debt is not exempt from this procedure. Although bankruptcy covers most unsecured debts, you cannot eliminate the obligation to pay federal student loans, child support, alimony, taxes, certain court fines, and other debts.
Types of Bankruptcy
Among many types of bankruptcy, the most common ones are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 is a “second chance” for everyone who needs to eliminate their unsecured debt. If you can no longer pay for your medical bills, personal loans, or credit card debt, Chapter 7 bankruptcy may be the right solution. This type of bankruptcy is based on selling your assets to repay the lender and can stay on your credit report for up to ten years from the filing date.
However, not everyone qualifies for Chapter 7 bankruptcy. To file for it, you need to take a means test, which shows whether your income is below the median income for your state.
Chapter 13 Bankruptcy
Another common type of bankruptcy is Chapter 13, which involves a three-to-five-year repayment plan, making you free from selling your assets. Depending on the plan negotiated by the bankruptcy court and your attorney, you will need to repay either a portion or the entire debt. Unlike the previous option, Chapter 13 bankruptcy can stay on your credit report for up to seven years.
Alternatives to Filing for Bankruptcy
To manage your debt, you don’t necessarily need to declare bankruptcy. It is a public record, which means that your future creditors or employers can get access to it. Furthermore, if you need to apply for a mortgage, the waiting period is up to four years, depending on the type of bankruptcy.
Debt Management Plan
Creating a repayment plan is a great alternative to filing for bankruptcy because it allows you to avoid many unpleasant consequences and save money. Negotiate with your creditors and try to build a more manageable debt plan. This option generally works as the creditors are interested in repayment of the funds.
Debt Consolidation Loan
You can apply for secured or unsecured debt consolidation loans depending on your credit history. If you have good credit, you can get an unsecured loan with lower interest to cover your debt, such as a car loan or mortgage.
If you are a bad credit borrower, getting loans with high interest is not an option. Instead, you can rely on secured options, which are more affordable but, at the same time, more risky.
Credit Counseling
Managing your debt alone is often complicated, so seek help from a credit counselor. They can advise you on budgeting and can negotiate with the creditors on your behalf.
