Pitfalls of Declaring Bankruptcy

Monday, December 11th

Pitfalls of Declaring Bankruptcy

When all other options have failed, those who are mired with extensive financial debts may find themselves facing the option of declaring bankruptcy.

There are two kinds of bankruptcy for which Americans are able to file: Chapter 13 and Chapter 7.

Chapter 13 bankruptcy, also known as "reorganization bankruptcy," is designed to allow consumers to repay creditors in full or in part. Consumers are given a three to five year window to repay their debts according to the terms of the bankruptcy agreement. Chapter 13 bankruptcy allows the debtor to keep their assets because they have agreed to work out a repayment schedule for creditors.

Qualifying for Chapter 13 bankruptcy involves an individual's ability to prove they earn enough money to be able to repay their creditors during the length of the repayment process. If a debtor is unable to prove financial ability to repay, they will not be permitted to file under Chapter 13.

The other kind of bankruptcy is known as Chapter 7, which involves all or some of a person's property being sold in order to settle their debts. Some property, such as clothing, vehicles and furniture, is considered exempt and cannot be liquidated during Chapter 7 bankruptcy.

There are some pitfalls to filing for bankruptcy that should be considered prior to making the move.

The most serious pitfall is that it will negatively affect one's credit report for 7 to 10 years. It can lower one's credit score, which will make it incredibly difficult to secure new lines of credit, including credit cards and loans.

Filing for bankruptcy also can affect a person's ability to secure future employment. In today's employment environment, prospective employers have made it routine practice to conduct full background checks on candidates for hire - which includes a copy of one's credit report. Over 80 percent of employers who were polled in 2012 said they use background checks and financial reports as a factor in the hiring process.

Those who have spotty financial histories are less likely to be hired than their more financially-secure counterparts.

Another hidden disadvantage to filing for bankruptcy is that the state and federal governments may not be required to provide tax refunds annually. Any money that may have been refunded could be garnished in order to pay creditors.

Those who have successfully filed for bankruptcy also can expect to pay higher interest rates for credit cards and other loans - if they are even able to secure them. Like consumers who have bad credit and low credit scores, those who have filed for bankruptcy can expect to be subjected to outrageously high interest rates for the duration of their bankruptcy and sometimes even a few years beyond it.

Another serious disadvantage to bankruptcy is that it may not clear all debt that is owed. Even in the case of Chapter 7 bankruptcy - when a debtor's assets have been liquidated in order to pay creditors - some debt will remain exempt from the bankruptcy process. The holders of that debt may come back on the consumer for repayment of the full amount owed.

While there are both advantages and disadvantages to filing for bankruptcy, consumers must evaluate their individual circumstances and then determine which outweighs the other before making the decision to file. Thankfully, there are other options, such as debt consolidation and debt settlement, which can help a consumer much better than declaring bankruptcy. A knowledgeable debt relief company can guide consumers through which option is best for them.