Understanding the Consequences of Bankruptcy
For some consumers, declaring bankruptcy can provide relief from seemingly insurmountable debt. But the decision to declare bankruptcy should not be taken lightly. It is a legal process with specific rules and requirements. And in some cases it creates more financial challenges than it solves. Of course, if you are considering bankruptcy as an option, your first step should be consulting a qualified bankruptcy attorney who can help you evaluate your situation. In the meantime, let’s take a look at some of the consequences of bankruptcy:
Loss of Property
Both types of personal bankruptcy — Chapter 7 and Chapter 13 — can involve surrendering certain possessions as a way to raise funds to repay creditors. Referred to as “non-exempt assets,” these possessions may include:
- Vacation or rental properties
- Valuable art, stamp or coin collections
- Fine jewelry and designer clothing
- Antique or contemporary furniture
- Late-model vehicles
- Certain types of investments
Others May Be Responsible for Certain Debts
If you have co-signers on any loans you are attempting to discharge in bankruptcy, they will be responsible for taking over payments on those loans. This can cause financial hardship for the co-signer and create strain in the relationship.
Learn more about the pros, cons and responsibilities of cosigning a loan.
Damage to Credit
Declaring bankruptcy can do significant, long-term damage to your credit. Initially, it will be nearly impossible to secure any new credit or loans. As time goes on, creditors may begin to offer credit again, but under strict terms and with significantly higher rates. And it isn’t a short-term hit. A bankruptcy can stay on your credit report for up to 10 years, sending up a red flag every time a potential creditor reviews your information.
Certain Debts Remain
Consumers often view bankruptcy as a “fresh start,” which isn’t entirely accurate. Very few borrowers emerge from bankruptcy with zero debt. That’s because not all debts get wiped away in bankruptcy, including:
- Most student loans
- Federal tax liens
- Court-ordered alimony or child support
- Certain government or court fines and penalties
Additionally, the act of declaring bankruptcy adds additional expenses, including attorney’s fees. For those already struggling, these new expenses create more financial hardship.
Look for Alternatives
In light of the potential consequences, the decision to declare bankruptcy should never be taken lightly. Before choosing it as a way to manage problem debt, consider the alternatives. These can include credit counseling and a debt management plan. This can be an excellent option for consumers who have some funds to pay bills every month, but can’t make progress toward paying down the principal debt due to high interest rates fees. If you’re in this situation, one of our certified credit counselors can tell you more and help you get started.