When you are in the choking hands of debt, bankruptcy might seems like the only way out. The solution some people turn to when they are in financial holes, bankruptcy is -- in reality -- not an easy fix and should not be considered lightly. Bankruptcy is a financially and emotionally draining life decision that will affect you and your family for many years to come.
Although it might seem like your only alternative, and could very well be, avoiding bankruptcy at all costs is likely the best move for your finances and life, as filing for bankruptcy follows you for years. This blight on your financial history could keep you from obtaining loans, property and even a job. Consider the negatives of filing for bankruptcy detailed below before thinking it is a quick and painless solution to your financial woes.
How does bankruptcy work?
There are two types of bankruptcy:
- Chapter 7 bankruptcy: Total bankruptcy -- it will erase a majority of your debts along with taking all of your assets, such as cars or your property. Chapter 7 bankruptcy will stay on your credit report for 10 years.
- Chapter 13 bankruptcy: Acts as a payment plan -- you negotiate with creditors regarding how to pay for your outstanding debts. Chapter 13 bankruptcy allows you to keep your property and can even stop your house from entering foreclosure. However, this type of bankruptcy will still stay on your credit report for seven years.
A common misconception is that filing for Chapter 7 bankruptcy is an easy way to get out of your debts and start over with a clean slate. However, this type of bankruptcy is very difficult to qualify for and will likely still result in some type of repayment plan for at least a portion of what you owe.
Secondly, bankruptcy does not erase all debts; you will still be responsible for student loans, tax debt, child support or alimony, and other nondischargeable debts.
Other consequences of bankruptcy
No matter which type of bankruptcy you file, either will have serious and negative consequences on your present life and future. For example, loan applications will ask if you have ever declared bankruptcy. Even if the bankruptcy is off your credit report, you still must disclose it. Failing to do so constitutes as criminal fraud.
Similarly, job applications and future employers might ask if you have had any bankruptcies. Many employers choose not to hire individuals with past bankruptcies because they consider it a character flaw that will affect your reliability as an employee. Other employers, such as those in various government entities, cannot hire individuals with past bankruptcies due to the nature of the positions.
If you plan on renting or leasing property, chances are it will be very difficult as well. Usually, landlords do not want to rent to those who have had financial struggles in the past.
However, finding future credit is not too hard. Credit card companies are generally quick to forgive if it means you will spend more money and accumulate more debt. Many credit card companies will also slap on a higher interest rate or annual fee because of your past bankruptcy.
Perhaps most importantly, bankruptcy adds stress to your life. It can affect your health, emotional well-being and relationships.
When is the right time to file for bankruptcy?
Bankruptcy is a personal financial decision that should be researched and thought out wisely. Financial counselors and bankruptcy lawyers should be consulted, too. It is best to avoid bankruptcy at all costs, however. Many people have been able to turn their lives around from financial devastation -- it just takes a great amount of sacrifice and dedication.
Bankruptcy might seem like the magic eraser to your debt, but do not be fooled. Bankruptcy is more like a ball and chain: It follows you around and weighs you down for many years to come. Exhaust every other option possible before filing for bankruptcy if you truly want to be financially free and happy.
This article originally appeared on GoBankingRates.