Opting for personal bankruptcy as a way out of debt is not a decision to be taken lightly and you should consider how it may affect your life. Whilst it can offer relief from the stress of the immediate financial situation, it can have long term consequences on future credit. It may bring feelings of shame and failure and it will become a matter of public record. Bankruptcies remain on credit reports for ten years and debtors may lose certain assets whilst remaining liable for some debts.
Most personal bankrupts choose to file for Chapter 7 bankruptcy which discharges all debts with the exception of student loans, taxes, child support and alimony. Chapter 13 is another option but the debtor remains under a court supervised order to enter into repayment plans with creditors. Whilst assets are protected future income must be allocated to paying down debt. Chapter 7 is more popular as it is a quicker process and discharges most debts immediately.
The most immediate concern that potential bankrupts have is what assets they will lose by filing. Although bankruptcies fall under federal jurisdiction the seizing of assets is governed by individual state law. There will be an amount of allowable equity in the home which may protect it from being sold, a vehicle can usually be retained, and personal affects and furniture are exempt. Retirement funds are protected from bankruptcy seizures but assets such as personal savings, land and second homes will be lost.
Once your debts are discharged by bankruptcy you will receive relief from creditors and collectors who are stayed by the bankruptcy. They are no longer allowed to contact you regarding the debt. If any of your debt was co-signed by a guarantor they will become liable for your debt. Conversely if you stood as guarantor for someone else your liability will be discharged.
As a bankrupt you will be required to undergo credit counselling which will teach you how to better handle future finances. You will not be given a second opportunity to file for bankruptcy for the next seven years so it is imperative that you take control of your finances prudently and establish a budget and savings.
A recorded bankruptcy will ruin your immediate credit but it will not be a permanent situation. Whilst the bankruptcy will remain on your credit report for ten years, employers are not allowed to discriminate against you because of it. It is advisable to start to re-establish a credit reputation by using a secured credit card prudently.
It is even possible for bankrupts to leave the court and apply immediately for credit from sub prime lenders but this should be avoided. The costs will be high in terms of interest rates and fees, and it makes more sense to establish credit over time. A good credit reputation will enable bankrupts to become eligible for home mortgages within 3 – 4 years.
It is important for those considering bankruptcy to consider other viable options first before deciding to proceed. The benefits are the relief from debt and collectors but this should be weighed against the possible shame and sense of failure.