A personal bankruptcy is a very common thing nowadays and still it is surrounded by myths and fears that many cannot overcome. Surely, debt relief inevitably brings consequences that are both negative and positive. Contrary to common belief bankruptcy is not “the end of life”; in fact – it’s sooner a beginning of life free of stressful relationships with creditors.
Before making such life-turning decision one should comprehend and weigh all aspects of bankruptcy and all consequences that a debtor will face after going bankrupt. When we say “consequences” that doesn’t always mean negative ones. The bright sides of going bankrupt outweigh negativity and make the whole deal worth of your efforts, time, and money spent on a lawyer.
Obviously, this is a purpose of the whole thing, to get the debts discharged (Chapter 7) or reorganized (Chapter 13). When the summarized amount of loans become unbearable and all your income goes for paying the interest rate and still the debt is increasing month by month, bankruptcy becomes the long-awaited relief that brings an instant freedom from that burden.
If your summarized monthly income is enough for paying at least a part of your debt, you’ll be offered to turn into Chapter 13 bankruptcy. In this case, instead of discharge, your debts will be reorganized and the interest rate cut to make it easier for you to repay the loans.
Even if your file under Chapter 7 that is a liquidation bankruptcy, not all your debts could be written off. There is a whole list of debt types that will stay with you forever and alimonies, taxes, child support and Student loans are among them.
Another negative aspect is that only unsecured loans can be forgiven, while secured ones will be solved through your collaterals foreclosure. If the lender has a lien on your property, you will have to give up on it or pay the secured loan back despite going bankrupt.
2. Automatic stay
As soon as your bankruptcy papers are accepted by the court you are under automatic stay law that prohibits all possible actions from the side of creditors and collectors. Nobody is allowed to disturb you in any form – no calls, no emails or threats. Your Trustee (officially appointed by the U.S bankruptcy court) will speak and deal with creditors on your behalf.
Even if you don’t have a bankruptcy approval you anyway may breathe free, because even the sole fact of your filing for bankruptcy already gives you protection from the government. In a case your petition is denied by the court, an automatic stay mode cancels.
Like it was said above, the automatic stay is not applied to secured loans, so those creditors who have a lien on your property (a house for example) have the full right to repossess it even if you are going through bankruptcy. So it may turn out that when you’ll go through hard times of bankruptcy process, your other creditors will add even more stress by withdrawing your collateral.
3. Credit score
Naturally, your credit score after the bankruptcy will plummet and you will be seen by creditors as an insolvent borrower, so it will complicate your following attempts of getting new loans. Gradually, your credit score will be restored, especially if you’ll learn financial discipline and repay new loans and interests on time.
Due to the very low credit score new loans will cost you more as lenders will include the risk into the interest rate, so you are advised to be very careful with borrowing money again.
Due to the information about your bankruptcy is going public for 10 years, your chances to get a cheap loan are miserable. If you’ll need to get a loan again you have to be ready to pay a high interest rate for it.
Strangely, but there is a positive side of having your credit score ruined. It gives you a precious lesson of being disciplined with the money and prevents you from getting another loan. The thing is, when your credit score is low you will not be offered attractive loan terms and thus you will not fall into a temptation to borrow money when you can’t afford to pay it back.
4. Property foreclosure
In order to satisfy interests of your creditors, the Trustee who will be appointed to you by the bankruptcy court will manage your assets. That means your property will be foreclosed (by the court’s decision). There is exempt and non-exempt property. The exempt property will not be foreclosed, while non-exempt will be taken off and sold out to distribute funds among your creditors. That is why the court is so strict about debtors who are trying to hide their property prior filing for bankruptcy. If you will be caught on hiding some of your assets or transferring right for ownership to your relatives, you will be charged a fee and prohibited to file for bankruptcy during a long period of time.
Exempt property is a property that a debtor is allowed to keep after the bankruptcy. Normally, those are daily necessities, a cheap car, clothing, and other personal stuff. Anyway, a really good and experienced bankruptcy attorney may convince the court to let your keep even a house (there are many examples of such cases). So, you will not be left homeless with no means for living. Even after declaring bankruptcy you will have everything that is needed to lead decent lifestyle.
5. Public information
To be honest, the only positive aspect of your bankruptcy being available for public access is that you will have to learn how to live with that and this eventually will make you psychologically stronger.
Negative aspect of losing privacy about your financial status is that your potential employers will always have doubts before hiring you, as they will see you somewhat non-capable to manage financial questions. It will be up to you to prove them he opposite.
Another complication of your public bankruptcy records is that lenders will not be willing to grant you another loan knowing you are insolvent and non-reliable in terms of repaying the loan.