8 Reasons Why You Should Not Declare Bankruptcy
If you’re struggling with crippling debt, declaring bankruptcy may feel like the best way to free yourself from financial burdens and start over. But, while bankruptcy can absolve you of certain financial obligations, it won’t remove all of them. Plus, it stays on your record for seven years and may affect you more than you realize.
Before you declare bankruptcy, make sure you’re clear on the pros and cons. There may be an alternative solution to your financial woes that will enable you to get back on track faster than a bankruptcy declaration.
Below, we’ll take a closer look at some of the reasons why filing for bankruptcy may not be a good idea for you.
What Is Bankruptcy?
Declaring bankruptcy is a legal process through which you state that you do not have the means to pay your outstanding debts. Bankruptcy filings are managed through federal courts. The judge and court trustee will analyze the outstanding debts and the debtor’s assets and income and decide whether or not they can realistically repay them.
There are six different chapters of bankruptcy, each with its own nuances. Most consumers who file (or consider filing) will file for Chapter 7 bankruptcy.
When you declare Chapter 7 bankruptcy, the court will determine whether your debt is insurmountable. If they decide the debt is unmanageable, your bankruptcy will be “discharged,” meaning much of your debt will be wiped clean. They will then liquidate as many of your assets as possible and apply the proceeds toward the balance of your debts. Most individuals who declare Chapter 7 bankruptcy have an income that falls below the state medium, making it difficult or impossible for them to repay debts.
If you earn a regular income (above the state median), you will likely file for Chapter 13 bankruptcy. With Chapter 13 bankruptcy, instead of having your assets liquidated, you will enter into a debt repayment plan for a set period, usually 3 to 5 years.
1. Bankruptcy Doesn’t Absolve All Of Your Debts
While bankruptcy is often seen as a way to “wipe your slate clean” and get creditors off your back, it doesn’t necessarily absolve you of all of your debts.
When you file for bankruptcy, you’ll be relieved of your obligation to pay your credit card debt, medical bills, and other unsecured debts. However, you’ll still be on the hook for secured debts like student loans, alimony payments, child support, and your car loan, mortgage, and any tax debts you carry.
Additionally, any co-signers on your outstanding accounts will not be alleviated of their responsibility to pay, even if you are.
If you’re considering filing for bankruptcy because you’re struggling to stay on top of your debt payments, consider debt consolidation instead. Consolidating your debts into one monthly payment makes it easier to track your finances, and you may even be able to secure a lower interest rate. Using debt consolidation can be an effective way to regain control over your finances, and it will make the process of rebuilding credit faster than if you declare bankruptcy.
2. Filing For Bankruptcy Has A Price-tag
And no, we don’t mean just a figurative one. There are expenses associated with filing for bankruptcy. According to Nerdwallet, between filing fees and attorney fees, bankruptcy could cost you anywhere from $800 to $6,000, depending on which Chapter you file.
When filing Chapter 7 bankruptcy, you’ll likely be asked to pay the attorney fees upfront, meaning you may need to save money for several months before you can afford to file.
In some cases, you may be able to secure pro bono legal assistance, but this is typically reserved for individuals who can demonstrate extreme need.
3. It Will Be More Challenging To Secure A Rental
Renting after bankruptcy isn’t impossible, but it will likely be harder to find a rental. Typically, a history of bankruptcy is a red flag for landlords, as they are inclined to select tenants who have a solid track record of financial stability and responsibility. If you live in a competitive rental market, it could be especially challenging to convince landlords to rent to you. You may have to settle for a cheaper rental or bring on a co-signer to help you qualify for an apartment.
4. Your Assets May Be Liquidated
Your assets may be liquidated to cover your debts when you file for bankruptcy. The assets at stake differ slightly depending on which chapter of bankruptcy you file.
Generally, the assets at risk include:
- Material items including clothing, furniture, vehicles, artwork, and more
- Real estate such as land or houses
- Financial assets, including retirement accounts
Some assets are exempt from liquidation, namely items that are essential for performing work and health-related equipment. Exemptions vary depending on the type of bankruptcy you file and the state where you live.
For example, when you file for Chapter 7 bankruptcy, your home may be liquidated. However, if you file for Chapter 13 bankruptcy, residences are exempt.
5. Bankruptcy Stays On Your Credit Report For Up To 10 Years
You can rebuild your credit after declaring bankruptcy, but once you file, it will appear on your credit report for 7 to 10 years, depending on which Chapter your file.
If you declare bankruptcy, you will need to work hard on rebuilding your credit so you can overcome this negative mark on your credit report. It will be a red flag for lenders for years to come, even once you rebuild your credit score.
Before filing for bankruptcy, think through how it might affect your future goals. If you hope to purchase a home, a car, or apply for any sort of credit or loan, a history of bankruptcy will make it more challenging and more costly.
6. Gaining A Mortgage Will Be Harder
Not only does bankruptcy lower your credit score and leave a black mark on your credit report for up to a decade, but you are also subject to a waiting period before you can apply for a mortgage.
The exact amount of time you must wait varies depending on which Chapter of bankruptcy your file. For Chapter 7, borrowers must wait four years before applying for a conventional mortgage, while Chapter 13 filers must wait two years from the discharge date or four years from the dismissal date.
However, you can apply for FHA loans, VA loans, or USDA loans after as little as one year after filing for bankruptcy. The waiting periods may also be different if a borrower is experiencing extenuating circumstances such as divorce or illness.
Beyond the waiting period, you may face higher interest rates and more difficulty gaining approval for a mortgage with bankruptcy on your record.
7. It May Be Harder To Secure Employment
While employers are not technically allowed to disqualify job searchers solely for having bad credit or a history of bankruptcy, it can still work against you in a job search. Credit checks are common for roles the involve access to company assets or financial information, and credit history can be a factor in determining who to hire. If there’s a pool of promising applicants, hiring managers are liable to be biased in favor of candidates with a strong credit history.
If you’re considering filing for bankruptcy, take a moment to think through how it could impact your future job searches.
8. Your Access To Credit Will Be Limited
Having a bankruptcy on your credit report will hurt your credit score and make it difficult to be approved for credit cards in the future. You won’t be able to apply for a credit card until your bankruptcy has been discharged. For a Chapter 7 bankruptcy, the discharge usually occurs within 6 months of filing, while for a Chapter 13 bankruptcy, the discharge will take between three and five years.
While you can get by without credit accounts, it can be a hassle. You won’t be able to apply for a new phone contract, a credit card, car loan, or any other form of credit until the bankruptcy is discharged.
Once your bankruptcy is discharged, and you’re clear to apply for new credit cards, you may struggle to get approved. Your credit score will likely be low, and your bankruptcy will be a red flag for lenders, limiting you to secured credit cards with high interest rates.
Good credit opens many doors, so if you do file for bankruptcy, begin working to rebuild your credit as soon as your bankruptcy is discharged.
Alternatives To Bankruptcy
There may be alternatives to filing for bankruptcy, and you should pursue every possible avenue before choosing to file. By avoiding bankruptcy, you can maintain your credit history as much as possible, and once you get your debt under control, you’ll be able to rebuild your credit much faster.
The following are a few avenues to consider instead of bankruptcy:
- Work with a credit counselor: Credit counselors are experts in helping customers take control of their finances. They are sure to have all kinds of tips and strategies that you can use to overcome your debt. From helping you design a realistic budget to helping you negotiate with lenders, don’t overlook what these experts can offer.
- Look into debt consolidation: Consolidating your debt into a single monthly payment with a more favorable interest rate will help you become debt-free faster while rebuilding your credit.
- Negotiate debt settlements: Your lenders want their money back, and they may be willing to settle for a lower amount, offer a payment plan, or create some other arrangement to help you repay them.
- Scale back your lifestyle and live within a strict budget: Tightening your budget might require some sacrifices, but it will be worth it if you can avoid bankruptcy. Consider ways you can scale back, whether by downsizing your home, giving up a pricey hobby, or reducing your spending until your finances are back on track.
- Sell anything of value and put the funds toward debt repayment: Selling some of your valuable possessions could help you pay down your debt faster and save you heaps of stress in the long run. Is there anything of value you own that you can part with? Whether it’s sporting equipment, artwork, or jewelry, consider letting it go to improve your financial situation.
- Increase your income: If you’re not making enough to keep up with expenses, look for ways to change that. Do you have a hobby you could monetize? Is there time to pick up a second job? It may not be ideal, but it’s preferable to filing for bankruptcy.
Borrow money from friends or family: It might be difficult to ask, but borrowing money from friends or family might be preferable to filing for bankruptcy. Before you ask, make a plan to pay them back so you can approach them with confidence. They may be more amenable to helping if they know you’ve thought the entire scenario through.
The Bottom Line
If you’re in a position where you can’t keep up with your debt payments, bankruptcy may feel like your only option. While bankruptcy is one way to clean your slate and begin rebuilding your credit, it can be a long, costly process that haunts your credit report for up to a decade. Before filing for bankruptcy, analyze your situation carefully to determine if it’s truly the best option. There are other solutions you can pursue.