Any time you make a major financial decision, you must consider the bad along with the good. Bankruptcy is a powerful tool to erase past-due bills and get a new start. But it’s not without its drawbacks. Before you hurry to file, be sure you understand the consequences of filing bankruptcy.
People often hesitate to file bankruptcy because they know it will hurt their credit. A bankruptcy will show up on your credit history report for 7 to 10 years and will lower your credit score. Having a poor credit score can affect the interest you pay on future loans or credit cards and may make it harder to rent a home.
However, a bankruptcy doesn’t usually come up all at once. Most people considering bankruptcy already have poor credit. You may skip payments, carry high balances, and have a high debt to income ratio long before you file. All those things also hurt your credit score. A bankruptcy discharges those balances and resets your debt, giving you a chance to rebuild a strong credit history with payments you can afford. Many people find they actually have better credit as a consequence of filing bankruptcy discharge than they did before they filed.
The effect on your credit isn’t the only consequence of filing bankruptcy you should be aware of. Many people considering bankruptcy don’t look at the whole picture. By considering the long-term effects of bankruptcy you can make a more educated decision about whether it is the right choice for you.
Not every debt goes away at the end of the bankruptcy process. Any secured debt you have -- like a mortgage or home equity loan -- will continue after the case is finished. There are also other, nondischargeable debts, including:
If most of what you owe falls into one of these categories, the cons for filing bankruptcy may outweigh its advantages. However, by planning your debt management with a bankruptcy attorney, you can prioritize non-dischargeable debt payments before you file. Since the entire balance of dischargeable debts go away when the bankruptcy is filed, you can avoid giving those unsecured creditors more than the law requires.
Nearly two-thirds of consumer bankruptcies are filed under Chapter 7. A Chapter 7 bankruptcy resets consumer debt for those who can’t afford to pay what they owe. It does this by liquidating many of the consumer’s assets to satisfy as much of the debt as possible before discharging the rest. One consequence of bankruptcy under Chapter 7 is that you will need to sell many luxury possessions including boats, recreational vehicles, and second cars, sometimes even your home.
However, this consequence of bankruptcy isn’t as bad as it sounds. Texas bankruptcy law allows consumers to set aside significant amounts of property, exempting it from liquidation. Some people who file for bankruptcy find that liquidation helps them purge unnecessary items that have been weighing them down, helping them focus on what matters most.
Any bankruptcy will make lenders take a second look before giving you credit. One consequence of bankruptcy is that you generally can’t qualify for a mortgage or a car loan right away. However, if you choose to consolidate your debts under a Chapter 13 repayment plan, you are also promising not to take on additional debt without the court’s permission for 3 to 5 years while you work to pay off what you owe.
This isn’t as big an obstacle as it seems. Bankruptcy trustees generally approve post-petition debt if it will make it easier for you to complete your repayment plan. These new debt payments will be included in your repayment plan, limiting your additional out-of-pocket costs. You can also open new credit without the court’s approval as long as you pay the balances with the money left over after you make your Chapter 13 payments. The balances simply won’t be included in the discharge at the end of the payment period.
The best way to minimize the consequences of filing bankruptcy is to work with an experienced bankruptcy attorney before it is time to file. Your lawyer can help you make use of bankruptcy alternatives, prioritize your payments, and negotiate with your creditors to reduce how much you owe and make sure you get the most out of the bankruptcy process.
I’m Attorney Patrick T. Williams and I have been helping Houston-area families decide whether bankruptcy is right for them for over 20 years. As an attorney and CPA, I understand the pros and cons of the bankruptcy process and will give you clear guidance about how to maximize your debt relief. Please call me or fill out an online consultation form. I’ll review your financial situation and help you decide if a bankruptcy is worth the consequences for you and your family.