The Eternal Impact of Claiming Bankruptcy to Rid Debt

Key Takeaways

• The bankruptcy process only eliminates some debts
• Bankruptcy could result in the loss of property
• After bankruptcy, you must wait several years for some major purchases
• Credit bureaus will list your bankruptcy on your file for up to ten years
• Bankruptcy petitions permanently remain on public records anyone can access

The stress of carrying too much debt for the income you make could have you thinking that bankruptcy is the best way out. It seems easy enough. After filing a petition for relief, the collection calls stop. You turn your life over to the courts, and in about six months, you can emerge debt-free. 

Before taking this route, consider both the long-term and eternal consequences of filing bankruptcy, as in forever! 

Bankruptcy Does Not Eliminate All Debts – A bankruptcy judge can discharge certain unsecured debts such as credit cards, personal loans, medical debts, and some judgments. However, it typically does not eliminate debts such as student loans, tax liens, child support or alimony, debts incurred within the last six months, and some judgments. 

You Lose Possessions – Discharged secured debt, such as a home or car loan, will result in the loss of the asset. The courts can also require you to sell other possessions, such as titled personal property like a boat or ATV, along with assets such as real estate, collectibles, furniture, or jewelry. 

State by State: Each state has exceptions, which will list any assets you may retain. All assets you own above, and beyond the exception, the bankruptcy trustee can sell to pay creditors. Your primary home (provided you pay the mortgage) and retirement assets nearly always qualify for an exemption. You should not tap IRA, 401k, or other retirement funds to repay the unsecured debt because the courts protect these assets from creditors. Income received from retirement accounts does not receive the same protections. 

Bankruptcy benefits consumers who have few or no assets and is most useful in eliminating credit card and medical debts but there are always high life-costs when claiming it. What are life-costs? Let’s consider a few:  

Mandatory Waiting Period for Major Purchases – Filing bankruptcy will disqualify you for some loans and can affect your ability to obtain credit. Fannie Mae, Freddie Mac, and FHA loans have mandatory waiting periods before you can qualify for a new loan. Lenders also have waiting periods, which could be longer than the government agency requirements. In many cases, it will be four years or more before you can qualify for a home loan.

Credit cards, vehicle loans, and other forms of credit will have different rules for dealing with bankruptcy.

Bankruptcy Will Impact Every Aspect of Your Life for a Decade or More– A Chapter 7 bankruptcy remains on your credit file for ten years. During this time, you will likely pay higher interest rates on any new debt with rates of 30% or higher in the first few years. You are also more likely to pay an annual fee on new accounts, pay more for insurance, and have more difficulty renting a home, changing jobs, and qualifying for new services without a deposit. 

Bankruptcy’s Effects on Your Employment Prospects

Laws prevent an employer from firing you simply because you file bankruptcy. It is also illegal for an employer to demote you, lower your pay, or reduce your responsibilities due to bankruptcy. In most cases, your current employer will not know you have declared bankruptcy unless you seek a promotion. 

Employers can also discover you are in bankruptcy if they stop wage garnishments, you owe your employer money and want the debt discharged in bankruptcy, or you make payments to creditors in Chapter 13. 

A bankruptcy can also disqualify you for certain jobs. Employment with the government offers more protections than the private industry when it comes to bankruptcy. However, any job involving finance, law enforcement, or those requiring a security clearance could decline applicants with a prior bankruptcy.

Permanent Public Record – A bankruptcy never truly goes away because the bankruptcy proceedings become part of your permanent public record. It will appear on background checks and a search of your financial history. The record will contain details of your financial circumstances, why you filed, and what debts the court discharged.  

You must always confirm the bankruptcy on applications asking the question, “Have you ever filed for bankruptcy?” 

Conclusion

Bankruptcy should be a last resort option because it provides limited benefits in the discharge of debt and comes with a steep financial cost, which can offset the money saved through the discharge. You must also acknowledge, and in many cases, address the circumstances around your bankruptcy, indefinitely. The word, ‘forever’ is a very long time. 

FAQ

• How long will a bankruptcy stay on my credit?

  Bankruptcies remain on your credit report for up to 10 years and will impact your credit score for the same amount of time. Chapter 13, which requires you to repay creditors for up to five years, stays on your file for 7 years. Chapter 7, which liquidates assets and can discharge debts within six months, will remain for 10 years.

• Can I buy a home if I file bankruptcy?

   Most lenders require a waiting period before they will consider a loan after bankruptcy. Government-backed loans from agencies such as Freddie Mac and Fannie Mae have mandatory waiting periods. It could take four years or more before a lender will consider your loan application after bankruptcy. 

• How long will bankruptcy affect me?

  Bankruptcy can have a permanent impact on your finances because it becomes part of your permanent record. You must affirm your bankruptcy on any application asking the bankruptcy question, which could permanently affect your ability to get a loan, a job, a promotion, or other advancements.