Although filing bankruptcy is entirely legal, that may provide small comfort once you're experiencing the consequences. Bankruptcy is a process designed to shield debtors from debts they cannot repay. Individuals (as opposed to organizations) usually file either a Chapter 7 or a Chapter 13 bankruptcy.
You will not have to repay unsecured debts discharged through a Chapter 7 bankruptcy. Secured debts including mortgages and vehicle loans must be repaid, although the court may approve a repayment schedule for delinquent payments. A chapter 13 bankruptcy provides for repaying a portion of your debts as determined by a bankruptcy court trustee.
Bankruptcy: cliff-diving credit scores, and more
Filing bankruptcy has long term consequences. As a legal proceeding it becomes a matter of public record and will appear on your credit reports:
- Your credit scores can drop by 100 points or more depending on what they were prior to filing bankruptcy.
- Your creditors will close your credit card and loan accounts once informed of your bankruptcy. Re-establishing credit with a bankruptcy on record can be challenging and you won't qualify for "premium" credit cards.
- Potential employers and landlords may seek permission for reviewing your credit reports; if you refuse, you may not qualify for the job or housing you want. Employers and landlords may interpret your bankruptcy as a sign of financial irresponsibility, or they may disregard it.
- Getting a mortgage for buying or refinancing a home will cost more until two years after your bankruptcy has been discharged (completed) through the court.
- Federal income tax liens and student loans issued or guaranteed by the federal government are not discharged through bankruptcy court.
Finally, you'll pay attorney's fees up front and will also pay court costs including filing fees and trustee fees.
About the Author:
Karen Lawson is a freelance writer with 20 years of experience in mortgage banking, mortgage loan servicing, and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.