Although bankruptcy gives you a good chance for you to start over, here are some consequences that you need to know.
Chapter 7, which is known as liquidation, will ask you to repay the debts by selling almost all your possessions with some value. Chapter 13, which is known as wage earner’s plan, on the other hand, allows you to create a 3-5 years’ repayment plan and keep your assets intact. These two options both grant you a fresh start by using different methods.
However, you need to realize that filing for bankruptcy truly impacts your credit score. The record of bankruptcy would stay on your credit report for 7-10 years, which is decided by the chapter you file under. For example, the most common type, Chapter 7, would remain for 10 years, while a Chapter 13 filing 7 years. During the years, you may have a hard time getting new credit lines and hunting jobs.
In fact, it’s very likely that your credit report and your credit score are already damaged before you file for bankruptcy. Luckily, the report can be improved, especially through your consistent repayments since after. Given the long-term effects of bankruptcy, some experts believe it’s most beneficial to declare bankruptcy when you have more than $15,000 in debt.
Nevertheless, bankruptcy is no panacea. It does not absolve you of all your financial responsibilities. Some types of debts and obligations are not erasable. For instance, taxes, alimony and child support, federal student loans, loans obtained fraudulently, debts incurred after bankruptcy filing, as well as debts that arise within six months prior to the bankruptcy filing.
Finally, bankruptcy does not offer protection to your debt co-signers. Because one of the obligations for the co-signers is that they need to pay your loan if you didn’t or couldn’t pay. After you declare bankruptcy, your co-signers will be legally responsible for the debts and obliged to pay all or part of them.