If you are in a severe financial crisis, bankruptcy may be your only option. Bankruptcy has the potential to offer debtors a new financial life, free from debt. However, bankruptcy can have both positive and negative financial ramifications. During both the course of your bankruptcy case and for years afterward, the effects of your bankruptcy filing will force you make adjustments in your financial life.
Chapter 7 and Chapter 13 are your two primary bankruptcy options as a consumer debtor. The immediate effects of your bankruptcy will vary substantially depending on the chapter you choose. If you file Chapter 13, you'll have to repay some or all of your debt over a period as long as five years. You begin by submitting a proposed payment plan to the court when you file your case. Upon approval, you must begin making monthly payments. You can avoid a Chapter 13 payment plan by filing Chapter 7 bankruptcy, if you qualify. However, you might have to surrender some of your most valuable assets. Bankruptcy exemptions allow you to protect some of your assets. However, the specific exemptions vary among the states. Typically, you can protect items like tools of your trade, household furnishings and your retirement accounts. Some states, including Texas, have an unlimited exemption for homes, but others, like Alabama, protect only up to $5,000. Cars are often exempted to only a few thousand dollars. If you can't exempt an asset, the court will take it and sell it. Even if you can exempt your property from seizure by the court, you may have to face foreclosure or repossession if you cannot continue to make payments on your property or car.
The financial fruits of your bankruptcy come at the end of your case, in the form of the bankruptcy discharge. You'll get your discharge after you complete your Chapter 13 payment plan, or just a few months after you file your Chapter 7 case. In both cases, any unpaid debts that were included in your bankruptcy are no longer your responsibility. Your creditors cannot ever pursue you for repayment without breaking the law. Some debts do survive bankruptcy, such as child support, alimony and most taxes. However, you will know which debts won't be discharged before you even file your case, as they are clearly designated as priority debts on your bankruptcy petition.
Filing bankruptcy has the greatest negative effect on your credit score of anything, according to credit reporting agency Experian. However, your score might not decline much, or could possibly even rise, if you file bankruptcy after a long string of delinquencies. According to the Fair Isaac Corp., your payment history, which makes up 35 percent of your total FICO score, includes both late payments and public records, such as bankruptcy. If your score is already trashed due to a spotty payment history, adding a bankruptcy won't make a dramatic difference. Since the next largest portion of your credit score is the amount of debt you owe, at 30 percent, the discharge of debt you receive in bankruptcy could actually help this part of your score. A bankruptcy will remain on your credit report for 10 years, in the case of a Chapter 7 bankruptcy, or seven years, if you filed Chapter 13. Getting new credit can be difficult while your report still reflects a bankruptcy. Any new credit you obtain is likely to carry higher interest rates.
Technically, it is against the law for an employer to fire you simply because you filed bankruptcy. However, according to the Bankruptcy Law Network, there are cases in which a court has backed an employer's decision to fire an employee after she filed bankruptcy. Having a bankruptcy in your credit history could make you ineligible for certain jobs, particularly in government or the financial services industry. At the very least, you may have to explain the bankruptcy if a potential employer runs a credit check on you as part of the hiring process.
- Nolo: What Is Bankruptcy?
- Experian: Credit Advice
- U.S. Courts: Discharge in Bankruptcy
- Bankruptcy Law Network: Fired Because of Bankruptcy Filing, Court Denies Relief
- MyFico.com: What's in Your FICO Score
- Federal Trade Commission: Negative Credit Can Squeeze A Job Search
- ABC Good Morning America: How Bad Credit Can Affect Job Prospects
- TheBankruptcySite.org: Will Bankruptcy Stop Foreclosure?
- Bankruptcy in Brief: Dealing With Secured Debts in Chapter 7
- LegalConsumer.com: Alabama Bankruptcy Exemption Laws
- Thinkstock/Comstock/Getty Images
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- My Credit Went Bad After Already Having a Bankruptcy. What Do I Do?
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- What Happens When Bankruptcy Comes Off Your Credit Report?