Bankruptcy has become a kind of “quick fix” for debt that has gotten out of hand. Many people think it is easy to wipe the slate clean and get rid of debt by going bankrupt. It isn’t that easy, however, and it should only be used as a last resort.
The actual procedure for filing – the paperwork process itself – is relatively simple, but it goes beyond that. You’ll need to be able to justify the reason for bankruptcy, which will open your financial history for inspection by the courts. It will also be open to objections from your creditors, who obviously have an interest in stopping you from declaring bankruptcy.
There are also several long-term effects that bankruptcy can cause. Any credit cards that have balances that are wiped out by the bankruptcy will obviously be cancelled, but any other credit card accounts you have will likely be closed as well.
You will find it difficult to qualify for loans for a home, car or other large purchases. If you are approved, it will likely be at interest rates that are much higher than the norm.
Not all debts are cleared by filing bankruptcy, either. Student loans, outstanding tax bills (within the previous 3 years) and a number of other forms of debt will be exempt, leaving you with those payments even after going bankrupt.
A bankruptcy will remain on your financial record for 10 years, during which time you will find it difficult to qualify for any kind of financing, even if you keep a perfect credit record during that time.
A bankruptcy is generally viewed as a particularly bad mark on your credit score – more so than a low FICO score, late payments or other problems.
There are cases where bankruptcy is the best solution, however. It will stop debt collectors from hounding you (provided they receive the proper notification), any foreclosure proceedings will be stopped and your wages can not be garnished.
If credit card debt is partly to blame for being in a position of bankruptcy, there can be another hidden benefit. Because you won’t be able to qualify for credit cards after a bankruptcy, you will be forced to stop spending irresponsibly since you won’t have access to any credit cards.
Making the decision to declare bankruptcy can be painful, but if it is inevitable, the sooner you can get it done the better. It will ease the stress of dealing with unmanageable debt, and you’ll start to build a new credit history to replace the old one.