The Costs and Consequences of Bankruptcy Positive Consequences of Bankruptcy (you will be surprised…) The Negative Effects of Bankruptcy
Introduction from Attorney Waltzer
Usually, when people ask me about the consequences of bankruptcy, they want to know the bad stuff. I am happy and eager to tell them ALL of the risks of bankruptcy. However, what is interesting is that people ALSO don’t know about all the benefits of bankruptcy. Most people know that it gets rid of debt. But did you know that Bankruptcy can actually Improve Your Credit Score? Below is a list of the good and bad consequences of bankruptcy. This, and some expert bankruptcy advise will help you to know if bankruptcy is the solution for you.
Watch Out For The Misinformation Campaigns
The consequences of filing bankruptcy are often very misunderstood. There are a lot of companies and organizations that put a lot of misinformation about bankruptcy out there. Some of these mis-informers are intentionally misleading people. Some of them are just misinformed themselves and repeating bad information.
POSITIVE CONSEQUENSES OF BANKRUPTCY
1. Elimination of Debt
Bankruptcy will Eliminate Some or All of your Debt This consequence doesn’t need much explanation. You probably know that bankruptcy can get rid of the following:
credit card debt,
debt from repossessions,
debt from personal loans,
back rent for an old apartment (where you don’t live any more)
But, did you know that bankruptcy can sometimes also get rid of these debts?
Your Second Mortgage
Debt from overpayments of unemployment insurance, and other public services
Debt from law-suits and judgments not involving fraud
2. Improving Your Credit Score
Of course you have heard the stories about bankruptcy hurting your credit score. But the truth is that many people who file bankruptcy already have the worst credit. Bankruptcy cant make it much worse. However, for these people, if they didn’t file bankruptcy, it would take ten years or more to repay their debts and restore their credit score. With bankruptcy, they eliminate the debt, and can start rebuilding credit immediately. What this means, is that for many people, if you look at the long term, bankruptcy is surely the fastest way to recovering your credit. Don’t be fooled by the misinformation campaigns and myths.
You can read more by clicking the blue link to the Wall Street Journal Smart Money article that bankruptcy can help you to restore your credit score more quickly than if you struggle along with an impossible debt.
3. Peace of Mind, Peace of Life, Time to Focus on Family and Dreams
The most important and least discussed consequence of bankruptcy is that it eliminates a lot of stress. The stress of debt destroys families and destroys lives. The American Institute of Stress http://www.stress.org/americas.htm has a lot of information and links on how ‘stress’ kills us. However, you don’t have to look far to see that the number one cause of stress is money. Debt is a killer. Imagine the peace of not dealing with creditor calls. Having more time and money to invest in your future and your children’s future. This is the real reason more people should file bankruptcy. Right now millions of hard-working honest Americans are literally killing themselves to dig out of a debt-pit that is really a death-trap. Bankruptcy was created by congress to save these people from such a painful and futile existence.
NEGATIVE EFFECTS OF BANKRUPTCY
- You can not file bankruptcy again for 8 years. This, to me, is the most important consequence. You are basically using your “get out of jail free” card. If you think you will have a big medical expense or otherwise run into hard times in the next few years. You should think about whether this is the best time for you to file. Likewise, if you think you will do better in the following years, and make more money, you should file right away while you still can.
- Bankruptcy can be listed on your credit report for up to 10 years. This is the most misunderstood consequence of bankruptcy. That fact that bankruptcy I “listed” on your credit report does not mean that it ruins your credit for 10 years. Many people with a bankruptcy on their credit report get very good credit much more quickly than if they didn’t file bankruptcy. Having filed bankruptcy, by itself, will not prevent you from getting good credit in the near future (within a couple years). It will not prevent you from qualifying for a car-loan or mortgage either. Most clients get credit card offers only months after they finish the bankruptcy!
- Bankruptcy can hurt your credit score in the short run. It sometimes helps your credit score too. It all depends on how your credit and income are at the time you file. Either way, as I explain above, bankruptcy will not prevent you from rebuilding your credit and getting cards in the near future after your discharge.
Declaring Bankruptcy Can Improve Your Credit Score
THE DECISION OF whether to file for bankruptcy protection is not an easy one. Among the numerous concerns, one that is typically front and center is the worry that your credit rating will be so damaged that securing a loan — even at a lousy rate — will be darn near impossible.
But here’s some surprising news: In many cases, the damage done to one’s credit score isn’t nearly as bad as expected. Over the long run, obtaining a score high enough to make you eligible for very competitive rates isn’t out of the question.
Part of the reason why your score isn’t likely to suffer all that much is that most folks seriously struggling with debt aren’t exactly maintaining a top-notch score to begin with. “In virtually every instance, the consumer will already have repayment problems such as late payments, very high balances, charged-off accounts or collection accounts,” says Rod Griffin, a spokesman for Experian, one of the three major credit bureaus. For details on what goes into a credit score, click here.
In light of this, some consumers may even see a slight boost in their credit scores after filing bankruptcy, according to John Ulzheimer, president of Credit.com Educational Services, a consumer credit education group. Why? To start with, your credit report is largely wiped clean when you declare bankruptcy. Your high balances are removed as are any late payments or records of unpaid debts. Instead, the accounts included in the bankruptcy will be marked as “Included in Chapter 7 Bankruptcy” or “Included in Chapter 13 Wage Earner Plan,” depending on which type of bankruptcy you filed. Both types of bankruptcy affect your credit score in the same way, according to Ulzheimer. Granted, you aren’t likely to see a big jump — but if you’ve just been scraping by, your score isn’t likely to fall much further.
That said, a bankruptcy could help your score over the long term, as well. Here’s why: When calculating scores, the formulas developed by Fair Isaac (the company that calculates the most widely used credit score, known as the FICO score) are set up to grade someone’s credit standing as compared with that of consumers in a similar financial position. To do that, Fair Isaac divides consumers into 10 groups, using what it calls “score cards.” It then ranks the consumers in each group based on the others in the group. One of these score cards is bankruptcy filers. (For competitive reasons, Fair Isaac doesn’t release what constitutes all 10 groups.)
In other words, when you file bankruptcy your score is determined based on how you do compared with other bankruptcy filers, explains Fair Isaac spokesman Craig Watts. The reason? Fair Isaac has found this to predict credit risk better. “It’s a much fairer comparison,” he says. “You’re not compared with people with rosy, perfect reports.”
Declaring Bankruptcy Can Improve Your Credit Score (page 2)
As a result, credit scores can run the gamut among bankruptcy filers. “In that population, you’ll find some consumers who have very good FICO scores, some who have very bad FICO scores, and in between,” Watts says. (Fair Isaac doesn’t have statistics on the average FICO score for bankruptcy filers.) Granted, you won’t be able to bring your score up to the perfect 850 as long as your bankruptcy stays in your report, but with good credit management after filing, a score in the 700s isn’t impossible.
Then again, your credit score alone shouldn’t affect whether or not you decide to file bankruptcy. “You have to be realistic about your ability to get back on your feet financially,” says credit expert Gerri Detweiler, author of “The Ultimate Credit Handbook.” Most experts would still say that if you can dig your way out of debt without declaring bankruptcy, that’s a better way to go, since, among other things, you may be forced to sell certain assets — in some states even your home or car — to meet the bankruptcy filing requirements. (This can be the case with Chapter 7 bankruptcy, but not Chapter 13.) Another issue: Given the tougher new bankruptcy rules, you may not even be able to declare bankruptcy.
That said, if your debt payments are crushing you, bankruptcy will give you a much-needed fresh start. And with a few clever credit repair strategies, your score could be back in the 700s within two or three years.