Filing for bankruptcy can seem like a very attractive alternative if you’re faced with an insurmountable mountain of debt. You can get a chapter 7 bankruptcy for $500 or less that could save you thousands of dollars. But before you rush out to hire a bankruptcy attorney, here are six things you need to know.
You could lose property
One of the consequences of a chapter 7 bankruptcy is that you could lose what’s called “nonexempt property” (or the equivalent in cash). Of course, you may not have much nonexempt property. And the total amount of property you would be allowed to keep is substantial enough most of your possessions would be protected. You would probably be able to keep your home unless you have a lot more than $21,000 in equity per debtor. You should also be able to keep your automobile and up to $10,775 in household goods. But you could lose other possessions. If you have assets such as a motor home, a boat or a second home, you might be better off filing for a chapter 13 bankruptcy as this would allow you to keep all your possessions.
Your credit and reputation
A bankruptcy will stay in your credit report for as long as seven or 10 years, depending on the credit-reporting agency. Anyone who pulls your credit report will see that you had a bankruptcy. You will see your credit score go down maybe by as much as 200 points or more. Your reputation may also take a hit. This can be especially true in small towns or cities if you owe money to local merchants.
You may face discrimination
Government entities cannot discriminate against you because of a bankruptcy or because of debts discharged in a bankruptcy. This means that a housing authority or an agency that grants government assistance benefits cannot deny you help. Utility companies are not supposed to deny service because of a bankruptcy and private employers are not to discriminate when you apply for a job. Unfortunately, you could still be discriminated against because some employers won’t hire people who have had a bankruptcy.
You will lose your credit cards
Unless you can pay off all your credit cards before you file for bankruptcy, you will lose them. You may also find it nearly impossible to get a mortgage for the first five years after your bankruptcy. And it will be a very long time before you can get any new credit cards.
Not all your debts will be discharged
Despite what some people think, a chapter 7 bankruptcy will not discharge all of your unsecured debts. You will still be required to pay back any student loans as well as alimony or child support and any back taxes you owe.
The effect on your credit score
As reported earlier, a bankruptcy can lower your credit score by as much as 200 points or more. If you are able to get credit, it will come with a much higher interest rate. This can even have an effect on the cost of your auto insurance and your mortgage – if you are able to get one. You would also have to pay more for a personal loan or a line of credit, again if you’re even able to get either of these types of credit.
There are many cons or drawbacks to filing for bankruptcy. It pays to think carefully and explore other options before you file. Consumer credit counseling could be a good alternative. It has helped thousands of families cope with their debts. You might also qualify for debt settlement, which is a form of debt consolidation that doesn’t involve the need to borrow more money.