Why Bankruptcy Isn’t a “Get Out of Debt Free” Card

Why Bankruptcy Isn’t a “Get Out of Debt Free” Card

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 ten 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 non-dischargeable 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.

Related: How to Find a Bankruptcy-Friendly Bank

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.

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These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

  • All the
    things you have discussed here are really so important and should be noted.
    Nice points and benefits on bankruptcy shared.

  • Bankruptcy Clinic

    It is annoying to see people abuse the system and rack up huge debts with no intention of paying it back. If it was my world, i would make the consequences of bankruptcy greater.

  • 702diann

    I work in the bankruptcy field and some of the information is just not true. Each state has a set of exemptions. Debtors each get to keep their car. You get to keep the house you live in as long as you can pay the mortgage. Get your facts straight before you take this article to heart!

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