The intent of bankruptcy is to provide people with a fresh financial start. For many people, bankruptcy does just that. But filing for bankruptcy is not something to be taken lightly. Be sure you understand the negative consequences of filing for bankruptcy before you take the plunge.
A bankruptcy will appear on your credit report for up to ten years; longer if you apply for a loan in an amount equal or more than $150,000. How much this affects your overall credit depends on your credit prior to filing for bankruptcy. If your credit was a mess, then a bankruptcy filing won't have a huge impact. If, however, your credit was good, a bankruptcy on your credit report will cause a sharp drop in your credit score.
Many people can actually improve their score faster by filing for bankruptcy than if they didn't file for bankruptcy. This is because with a fresh start, you can start paying your bills on time, get your debt to income ratio in line, and begin building a positive financial picture. If not filing for bankruptcy means that you will continue to limp along, accruing late payments, delinquencies, and repossessions, your credit may stay in the dumps for a long time.
With a bankruptcy on your credit report, you'll have to wait a bit before you can qualify for a mortgage or car loan. And when you do qualify, you'll likely pay higher interest and fees on the loan. To learn more, see Getting a Mortgage After Bankruptcy and Getting a Car Loan After Bankruptcy.
In most cases, if you complete a Chapter 7 bankruptcy, you cannot get another Chapter 7 bankruptcy discharge for eight years and you can't get a Chapter 13 discharge for four years. If you complete a Chapter 13 bankruptcy, you cannot get a Chapter 7 discharge for six years and a Chapter 13 discharge for two years.
This can cause problems if you anticipate financial problems in the future. For example, say you lose your job, file for bankruptcy right away, and receive a Chapter 7 discharge. If you can't find a job for some time and your bills begin to mount again, you are barred from filing for bankruptcy again until you meet the above time frames.
Contrary to popular belief, you cannot discharge every type of debt in bankruptcy. Examples of debts that generally cannot be wiped out in bankruptcy include student loans, recent tax debts, child support, and alimony. To learn more, see What Happens to Your Debts in Bankruptcy.