Filing for bankruptcy in the United States is a legal process that allows people with too much debt to obtain relief and protect some of their assets. This process is designed to help alleviate some of the pressure from being overwhelmed with too much debt. Filing for bankruptcy doesn’t mean you are in dire straits, but it allows you to save your credit score and breathe easier, knowing that your debts are no longer hanging over your head.
Downsides of Filling for Bankruptcy
1. Your credit score is likely to drop
Most people who file for bankruptcy end up with a lower credit score than before. Bankruptcy will generally be reported on your credit report, and unlike applying for a new loan, your credit score will continue to drop. The impact of a bankruptcy filing on your credit score depends on where you live, but generally, you should expect your score to be in the low 600s once you file.
2. Your assets are vulnerable to creditors
If you get behind with your bills and are forced to file for bankruptcy, you will undoubtedly be asked to turn over your assets to have them wiped out. The most significant factor determining how many of help you get is the type of bankruptcy you file under. Filing under Chapter 7 allows the courts, but not the creditors, to seize everything liquid, while filing under Chapter 13 will enable you to keep most of what you own so long as it doesn’t exceed $753,000.
3. A Chapter 13 filing lasts three to five years
The court determines the length of time you must pay under Chapter 13, depending on the size of your debts and your income and expenses. You will be obligated to make payments monthly, usually through a third party or directly to creditors, for three to five years. The payment plan is designed to allow you to pay off 100 percent of what you owe while still keeping one vehicle, your home, and some essentials like clothing and food.
4. Creditors aren’t likely to work with you in the future
Once you file for bankruptcy, your creditors will be less likely to work with you in the future. One of the primary reasons why people file for bankruptcy is because collections agencies and lawsuits are hounding them. Creditors are typically willing to negotiate a settlement. Still, once you file for bankruptcy, they know that they won’t be able to get much, if any, of their money back, so they usually stop trying.
5. A bankruptcy will stay on your credit report for ten years
When you file for bankruptcy, the court will issue a discharge that releases you from your debts and liability. The shot will be reported on your credit report, so no further collection efforts can be made to get the money you owe. The best part is that once the bankruptcy is discharged, it will stay off your credit report for ten years. If a creditor tries to collect even after the ten years have expired, it can be reported again.
6. You still have to pay your debts
While filing for bankruptcy stops most creditors from trying to collect, it does not absolve you of your obligations. You still owe the money and must still pay if you want to avoid legal repercussions. If a creditor decides to take legal action against you after your bankruptcy has been discharged, they can do so, but it is much more complicated than when the debts are current.
7. You won’t be able to get a debt consolidation loan
Filing for bankruptcy is standard because getting a debt consolidation loan is easy. These loans have become so popular that many believe you can use them to consolidate all of your debts into one manageable payment. It is not the case, however. This type of loan offers no relief from your debts as they are still reported on your report and will not wipe out any of your obligations.
8. The process isn’t easy
The last thing you want to do when facing overwhelming debt is file for bankruptcy. It cannot be evident, and the process isn’t easy. It requires a lot of paperwork and explains every detail of how your debts will be paid off so that you can decide how much you can afford to pay each month. If you believe you might need help filing for bankruptcy, here is a free checklist to help, you get started.
Filing for bankruptcy is necessary to alleviate some of the strain caused by overwhelming debt. While many benefits come with bankruptcy, you should know about the potential negatives to ensure you’re making an informed decision. If you’re thinking about filing for bankruptcy, or if you believe that it might be appropriate for someone else, make sure you understand the downsides so that you can make your decision knowing everything involved.