Filing for bankruptcy is never the first choice. But there are times when it is the only option. The COVID-19 pandemic caused thousands of signature corporations to file for bankruptcy. Financial experts expect a wave of personal bankruptcy filings too. Find out how bankruptcy affects your life and how to minimize the impact.
What is Bankruptcy
Bankruptcy is a legal process. Depending on the type of bankruptcy you file, your debts will be fully discharged or reorganized. It is important to work with an attorney to help you select the type of bankruptcy to file. An attorney can help you prepare the paperwork to ensure that your petition is successful. Ultimately, it is up to the court to decide if you qualify for bankruptcy. You must prove that you cannot pay your debts. Many courts also require that you sign up for credit counseling.
Types of Bankruptcy
- The court will order the sale of any personal assets you own to cover what is owed to your creditors
- Any balance after the sale of assets is discharged.
- Student loan, taxes and court-ordered support payments cannot be discharged through Chapter 7 bankruptcy.
- Stays on your credit report for 10 years.
- You keep your assets.
- Your debt is reorganized. The court prepares a three-five-year repayment plan.
- Once you have completed the repayment plan, your debt is discharged. It may be possible to pay off all your debt during this time.
- Stays on your credit report for 7 years.
5 Ways Bankruptcy Affects Your Life
- You can lose your property. Whether you file a Chapter 7 or 13 bankruptcy, you can be ordered to relinquish your possessions, so they can be sold to satisfy your creditors. Depending on your circumstances, you could lose your car, home, jewelry, and other valuable possessions.
- credit score suffers. Bankruptcy remains on your credit report for many years. Depending on the type of bankruptcy you file, this negative mark could be on your credit report for ten years. However, over time, the impact on your credit score could be positive. Bankruptcy also stops spiraling debt. Your credit score will drop, but with a clean slate, you have an opportunity to rebuild your credit.
- It will be difficult to qualify for financing. Creditors will be reluctant to extend credit to you, or if they do, the terms will be less favorable. You will pay higher interest rates and fees. It may not be possible to get an auto loan or a mortgage for at least the first couple of years after filing bankruptcy.
- Bankruptcy affects your private life. Bankruptcy filings are public documents. The purpose is so that all creditors are aware of your request to file bankruptcy. The consequence is that the personal financial information you provided as part of your bankruptcy filing can be accessed by the public. Co-workers, employers, clients, family members and others can read the details of your financial life.
- Your stress is alleviated. You might feel depressed or guilty about filing for bankruptcy. But some events are out of your control. As mentioned earlier, a pandemic can suddenly wipe out your savings. You might have uncovered medical expenses, lose your job, or assume too much credit card and other debt. The positive aspect of bankruptcy is that you can now sleep better at night. Your debt has been discharged, or you have reorganized your debt and are in a repayment program. You no longer need to worry about legal action being taken against you.
Life After Bankruptcy
Bankruptcy affects your life in many ways, but you can recover. It will take some time, but you can rebuild your credit. Be sure that your debts have been noted as “discharged” or “included in bankruptcy” on your credit report. Apply for a secured credit card. Open a line of credit that you can afford and make every payment on time.