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Individuals and businesses sometimes reach a level of financial difficulty that a decision is made to look into the possibility of filing for bankruptcy. Indeed, there are situations where choosing bankruptcy is the most logical course. At the same time, bankruptcy filing should never been seen as an easy way to get out from under a mountain of financial obligations. There are consequences to bankruptcy that should be carefully weighed against the benefits. Here are a few examples.
First, a bankruptcy can make it very difficult to obtain credit in the future. Many people are under the impression that it is easy to obtain credit just after filing a Chapter 7 bankruptcy. Up to a point, there is some truth in this, as high risk credit card providers will often extend credit lines to people who have filed bankruptcy recently. However, it is common in many cases to limit credit to individuals and businesses for major purchases for a period of up to two years after the bankruptcy is considered fully discharged. For example, qualifying for a home loan will not be possible until two years after the Chapter 7 is discharged. If the individual filed a Chapter 13, all debts associated with the bankruptcy must be paid in full, two years must have passed since the bankruptcy was discharged, and the credit file in the interim must be free of any new negative entries.
Filing for bankruptcy can also impact future career opportunities. Often, a person who has gone through bankruptcy filing in the recent past is not eligible for consideration as a director in a business. It may also be impossible to hold certain offices in local organizations that would be helpful in furthering the career. The simple act of filing may diminish the level of confidence that current customers have in the individual or company, and can also put off potential clients who prefer to go with an entity that is more financially stable.
Depending on the circumstances, filing for bankruptcy will also mean losing personal assets. This can include property, the home, cars, or anything else of value that may be seized, sold, and used to partially satisfy the amount of outstanding debt. While this is not always the case, it is possible for creditors to petition the court to take this type of action.
At the very least, filing for bankruptcy means creating more bad credit history. The action will impact a credit score for at least six years and nine months, and possibly up to ten years, no matter how financially responsible the individual becomes after the filing takes place. At best, this means settling for credit that carries an outrageous interest rate. In the worst case scenario, it means an inability to obtain any type of financing for a home or car.
Filing for bankruptcy should always be the last resort. If any other arrangements can be made to pay off outstanding debt, they should be considered before engaging in any type of bankruptcy filing. While other methods may also damage credit rating, they also can help to begin the process of reversing a negative rating and restore a healthy credit score over time.