No one wants to file for bankruptcy. Yet, there were almost 800,000 total bankruptcy filings in 2016 alone—the vast majority of them by individuals. Even though this process is fairly normalized, it’s not something that you should take lightly. Here are five things you should consider before resorting to bankruptcy.
Do You Understand What Bankruptcy Means?
There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. These two types of filings work a bit differently:
- Chapter 7 bankruptcy is the most common form of bankruptcy. In this situation, a person’s non-exempt assets are liquidated for cash in order to pay back as much of the outstanding debt as possible. This process typically takes less than a year and is supposed to allow people a “fresh start.” This depiction can be somewhat deceiving, however, as you’ll learn from later points.
- Chapter 13 bankruptcy tends to take several years. Essentially, a bankruptcy court approves a plan for the debtor to pay back a set amount of their debts over a given period of time. This allows the individual to keep more of their property (such as a home). Although, you’ll need a steady flow of income in order to take advantage of Chapter 13 bankruptcy.
Bankruptcy Won’t Be an Instant Fix
As mentioned above, bankruptcy is often portrayed as a totally fresh start. That certainly sounds like a nice option. When you have an overwhelming amount of debt, getting a clean slate is often what you want more than anything else. But you really shouldn’t think of bankruptcy this way. Creditors aren’t going to be particularly antsy to work with someone who hasn’t paid in the past. Bankruptcy is the ultimate sign of bad credit for lenders, which is why claiming it tends to destroy your credit score. In fact, it often takes people as long as 10 years to get their financial life back on track after going through bankruptcy.
Are There Other Options?
It’s beneficial to understand the full picture before you decide to file for bankruptcy. This needs to be your absolute last resort, not something you do just because your debt is making you uncomfortable. You’ll realize that bankruptcy doesn’t actually make your life easier—even if it cancels out a lot of your prior debts. It’s possible that you can refinance some of your debt. Renegotiating your payments can make your loans a lot more affordable to you.
However, many creditors only help people refinance when they’ve been consistently making payments. It’s possible you haven’t been able to do this. If you’re in this situation, you should consider working with a debt relief agency such as Freedom Debt Relief. They’re experts at renegotiating debt. With the help of an agency, it’s possible to pay off your debts in much less time, without having to resort to bankruptcy.
You Might Not Be Able to Get Loans without High Interest Rates
As you now know, some of your assets can be taken from you when you declare bankruptcy. This sometimes includes your house or car, which are both vital parts of your life. How are you supposed to get to work, or do anything, without your vehicle? It might not even be possible depending on your location and access to public transit. You’ll have to get another car. The problem is, after filing bankruptcy, people aren’t going to be eager to lend you more money. This means you’ll be stuck with high-interest loans. Thus, you’ll actually have to pay more for the same car than someone with good credit.
Might Be Harder for You to Get a Job
As if all the previous points weren’t enough, filing for bankruptcy can actually make it harder for you to get a job. This is because a lot of employers now run credit checks before hiring someone new. Some people can view a past bankruptcy as a sign of unreliability. This is one of the last things you need when you’re already in a tricky financial situation. The possibility of future employment struggles is just another reason to think twice—or more times—before deciding to file for bankruptcy.
You have to do a careful analysis of the pros and cons of bankruptcy for your particular situation. No two people have the exact same financial background or future. Be sure you carefully consider the ramifications of bankruptcy before deciding it’s your best option.