Filing for bankruptcy can be a daunting task. But it can be the right option for financial challenges an individual or business is experiencing. Declaring bankruptcy offers a sustainable solution that provides debt relief and a new start. This fresh start allows people to develop and practice healthy financial habits that help manage life successfully.
Declaring bankruptcy also has specific consequences that impact finances which can be difficult to navigate initially. It is critical to understand both the advantages and outcomes of declaring bankruptcy so you have knowledge of the full scope and can determine if this option is the best solution for you.
Benefits of Declaring Bankruptcy
Though filing for bankruptcy can be overwhelming and may seem like a permanent marking on your financial record, it offers important benefits that can transform one’s financial life. Bankruptcy is intended to be a legal option and opportunity to effectively address debt which is often burdensome. Benefits of declaring bankruptcy includes the following:
- Grants an automatic stay. Once bankruptcy is filed, the court issues what is called an automatic stay which prevents creditors from taking any action to collect the debts that are owed. This includes repossessing property (cars for example), lawsuits, calls/emails/or letters from the creditor, wage garnishments, home foreclosures, etc.
- Dischargeable debts. Filing for bankruptcy could allow you to discharge, or cancel, your responsibility to repay dischargeable debts. These debts can be eliminated by bankruptcy, this includes credit card debt, medical debt, and debt from personal loans.
- Credit score may improve. Though filing for bankruptcy remains on one’s credit report for 7-10 years, credit score can improve. This can happen through dischargeable debts being eliminated, improving the debt to income ratio. Also, once debt is solved, people can start rebuilding their credit.
- Provides a fresh start. Declaring bankruptcy allows people to resolve their financial challenges. This debt relief enables people to have a fresh start that is both emotionally and materially beneficial. People can learn, develop, and practice financially healthy habits which enhance their quality of life. Filing for bankruptcy gives people access to financial counseling that provides these useful tools.
These benefits alleviate the stress and anxiety that is often experienced with financial hardship. It gives people an opportunity to start rebuilding and managing life in balanced ways.
Disadvantages of Declaring Bankruptcy
Filing for bankruptcy does also come with specific outcomes that have longer-term effects on financial life. It is important to be aware of the full impact of declaring bankruptcy so you can make the most informed decision. A few disadvantages include:
- Canceled credit cards. Credit card companies often immediately cancel the credit cards you hold with them when filing for bankruptcy. This makes it difficult to have or obtain new credit cards.
- Impact on credit score. Bankruptcy filings remain on credit reports for 7 to 10 years. This is a negative mark, having an immediate impact on your credit score. But it is important to know that it can also improve credit score once you start rebuilding credit.
- Difficulty getting new lines of credit. Getting new lines of credit – credit cards, personal loans, mortgage – can be difficult. One’s credit score and report are part of the application process for new loans and a bankruptcy filing can lead to denial of new credit. People are eligible for unsecured credit cards which allows people to rebuild their credit.
- Denial of tax refunds. Tax refunds from federal, state, or local governments can be denied based on a bankruptcy filing.
- Impact on jobs and housing. Because a bankruptcy filing goes on public record, people can have access to this information when applying for jobs or housing which can impact your application.
There are numerous consequences of declaring bankruptcy that are beneficial and can also be challenging to navigate. Being aware of the short and long-term impact of filing for bankruptcy can help you decide if this is the best solution for you.
Filing for bankruptcy involves a detailed process and providing extensive information. Consulting with a lawyer who can provide expert legal advice is an incredibly helpful way to receive support and guidance with navigating your options!