Before you consider filing personal bankruptcy, it’s important to get the whole story on the negative effects of bankruptcy. I went through bankruptcy four years ago, and I am still sorry I did it. I did not know about the true effect of filing bankruptcy, and if I had, I might have made a different decision.
There are long term effects of bankruptcy which you may not be aware of, since bankruptcy stays on your credit report for ten years, unlike other debts. When you first visit a bankruptcy lawyer, they may explain some of the effects to you, as mine did. Yet they probably won’t go into too much detail, because they don’t want to spend a lot of time with a client who isn’t going to file – why try too hard to talk you out of it – and talk themselves out of a fee!
So what are the bankruptcy negative effects you need to know about? For starters, the cost. If you are going to file bankruptcy, you are most likely to need a bankruptcy lawyer to do it. While there are some books about how to prepare for a do it yourself bankruptcy, it’s pretty difficult due to all the paperwork. You better be an organized person. So if you don’t do it yourself, hiring a lawyer will cost in the range of $2,000 to start, just for lawyer fees. The bankruptcy court itself charges about $300 in filing fees and costs, on top of your lawyers fees. So it’s not an inexpensive process.
Next, if you have some debt that can’t be discharged, you’re going to still have debts to pay after you file. For example, federal income tax owed, spousal or child support, and student loans are just some of the debts you can’t wipe away with bankruptcy. If this is the bulk of what you owe to others, bankruptcy might not help.
If you do file, and get a discharge under Chapter 7 or enter a repayment plan under Chapter 13, the fact that you filed for bankruptcy will remain on your credit report for ten years. Probably at the time you filed, your credit history was poor to begin with, and the filing itself will not lower your credit score after bankruptcy. But worse than a bad credit score, lenders in the future will see that you filed bankruptcy once upon a time, and many will turn you down flat regardless of your score.
Especially in these bad economic times, banks are far less likely to lend to anyone but the best credit risks. They are looking for high credit scores to begin with. It will take years to rebuild your credit after bankruptcy, but even if you do so successfully, the bankruptcy can haunt you for a long time.
Another problem with bankruptcy, and it’s not so much a problem as just an issue to consider, is foreclosure in bankruptcy. Many people think, incorrectly, that bankruptcy will save their home. In only a couple states can a debtor exempt his or her home, meaning, it is not touched by the bankruptcy. In other states, a mortgage lender can get permission of the court to sell your house. If keeping your home is of high importance to you, then you should consider Chapter 13, which can help you set up a plan to keep making payments. In Chapter 7, you would likely lose your house.
The bottom line is, after filing bankruptcy, your credit will suffer more than just a low score. Lenders will look at you differently, so regardless of what you do to rebuild after bankruptcy, consider that it could take five to ten years before you are considered a good credit risk again.