Bankruptcy is among the most effective options for getting out of debt, but bankruptcy comes with a number of adverse effects that should be considered before filing. Anyone thinking about filing for bankruptcy should carefully weigh the benefits of eliminating debts through the bankruptcy process against the adverse effects of doing so.
Personal Bankruptcy Under Chapters 7 and 13
There are several types of bankruptcies. Each type of bankruptcy is referred to by the applicable Chapter of bankruptcy law. Chapter 7 and Chapter 13 bankruptcies are often referred to as consumer bankruptcies. Chapter 7 is often called “liquidation” bankruptcy because it eliminates most types of debts within only a few months. Chapter 13 bankruptcy, sometimes referred to as “reorganization,” requires you to make monthly payments to the court for several years. The court eliminates the remaining debt at the conclusion of the Chapter 13 payment period.
Bankruptcy, whether under Chapter 7 or Chapter 13, can substantially lower your credit scores. People who make payments on a purchased item, such as a house, car or an item or service paid for through a credit card, are assigned a credit score by three private companies called credit bureaus. If you make timely payments, those credit scores tend to rise. Missing and late payments will usually reduce those scores. Bankruptcy eliminates most types of debts, meaning that the debtor is no longer required to repay the money. Because bankruptcy, rather than payment, eliminates the amount of money owed, all three creditor scores will usually decline substantially.
Credit scores are designed to help lenders predict whether a potential customer will repay money loaned if credit is given. A potential borrower’s credit scores appear on a credit report. A bankruptcy will appear on your credit report for 10 years and will hurt your ability to secure financing in the future. In some cases, a potential lender may decide not to lend you money. This is often the case when trying to secure a mortgage for a house, a loan for a car, or a lease with an apartment owner. Other lenders, such as credit card companies, may decide to extend credit despite the bankruptcy, but at a higher interest rate.
Bankruptcy can potentially hurt a person’s ability to find employment, especially if the job requires handling money. Potential employers might check your credit report and discover the bankruptcy. Federal law prohibits a government employer from denying employment to an applicant on the ground that he filed for bankruptcy. But there is no such restriction on private employers.