Bankruptcy can have long-term consequences, including difficulty obtaining credit, limitations on career opportunities, loss of personal assets, and negative credit history for up to 10 years. It should be a last resort, with other options considered first.
Individuals and businesses sometimes reach a level of financial hardship that a decision is made to consider filing for bankruptcy. In fact, there are situations where choosing bankruptcy is the most logical course. At the same time, filing for bankruptcy should never be seen as an easy way to get out of a mountain of financial obligations. There are consequences of bankruptcy that must be carefully weighed against the benefits. Here are some examples.
First, a bankruptcy can make it very difficult to get credit in the future. Many people are under the impression that it is easy to obtain credit right after filing for Chapter 7 bankruptcy. To some extent, there is some truth to this, as subprime credit card providers often extend lines of credit to people who have recently filed for bankruptcy. However, it is common in many cases to limit credit to individuals and businesses for major purchases for a period of up to two years after the bankruptcy is deemed fully discharged. For example, qualifying for a home loan will not be possible until two years after discharge from Chapter 7. If the person filed for Chapter 13, all debts associated with the bankruptcy must be paid in full, two years must have passed since the bankruptcy was discharged, and the credit file in the interim should be free of new negative entries.
Filing bankruptcy can also affect future career opportunities. Often, a person who has gone through a bankruptcy filing in the recent past is not eligible to be considered as a director in a business. It may also be impossible to maintain certain offices in local organizations that would be useful for career advancement. The simple act of filing can lower the level of trust current customers have in the individual or company, and can also put off potential customers who would rather go with an entity that is more financially stable.
Depending on the circumstances, filing for bankruptcy will also mean losing your personal assets. This can include property, the house, cars or anything else of value that can be seized, sold and used to partially satisfy the amount of the outstanding debt. While this is not always the case, creditors may ask the court to take this type of action.
If nothing else, filing for bankruptcy means creating more bad credit history. The action will have a credit score impact for at least six years and nine months, and possibly as long as ten years, no matter how financially responsible the person becomes after the filing takes place. At best, this means settling for credit that carries an outrageous interest rate. At worst, it means the inability to obtain any type of financing for a house or car.
Filing bankruptcy should always be a last resort. If other arrangements can be made to pay the outstanding debt, they should be considered before engaging in any type of bankruptcy filing. While other methods can also damage credit, they can also help begin the process of reversing a negative rating and restoring a healthy credit rating over time.
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