Understanding the Effects of Bankruptcy
Before resigning yourself to the idea that bankruptcy is the only option for you, there are things you may want to consider. Perhaps there is a way for you to work with your creditors and avoid bankruptcy altogether. The first part of this section demonstrates that there are some good reasons to avoid bankruptcy. However, there are also good reasons to file for bankruptcy, in the right circumstances. The second part of this section helps you determine if the circumstances are right.
Bankruptcy should be regarded as a last resort. Before you jump into a bankruptcy, it is a good idea to evaluate your financial situation and consider the effects of a bankruptcy.
A bankruptcy is a mixed blessing. It will have both positive and negative financial effects. These can be divided into short-term and long-term effects.
- Short-term effects. An immediate positive effect is that your creditors get off your back. However, this may only last a short time for certain kinds of debts. Such things as utility cut-offs, mortgage foreclosures, or evictions may only be delayed for a few days or weeks. Once you file for bankruptcy, your financial dealings come under the scrutiny of the bankruptcy trustee, and you will need his or her permission to sell any assets or pay any debts.
- Long-term effects. These are the effects after your bankruptcy is completed. The fact that you now have a bankruptcy in your credit history will make it more difficult for you to obtain credit. There are stories of people who cannot get a car loan, even with a 50% down payment, ten years after filing bankruptcy. However, a study by the Purdue University Credit Research Center once revealed that 16% of people who filed for bankruptcy were able to get some credit after one year, and 53% were able to get credit after five years.
It may also make it difficult for you to get a promotion or be given a position of trust at work, or to get hired by a new employer who does a credit check. You will probably also be starting over with fewer possessions than you had before your bankruptcy. Some of your property may get repossessed, and some of it may have to be sold. If a relative or friend co-signed a loan for you, that relative or friend will still be liable to repay the loan.
A bankruptcy may also cause you to lose your retirement benefits.
You will have to be very careful not to get into debt problems again. You can only file for bankruptcy once every eight years.
In addition to the financial effects, most people experience some emotional effects when they file for bankruptcy.
- Yourself. You may experience a feeling of failure or dishonesty. The feeling of failure may occur because you could not manage your affairs better or were not smart enough to handle your money, while the feeling of dishonesty may arise because you feel you are cheating your creditors. Although there are many logical arguments for not feeling this way, many people still cannot overcome the feeling on an emotional level. Regardless of how others really feel about your situation, you will see and interpret their reaction in terms of how you feel about yourself.
- Your family and friends. If you are married, your spouse and possibly your children will have to know about the bankruptcy. You will need to prepare for how you will discuss it with them. You may also have to be prepared to deal with their feelings of failure, disappointment, and guilt. Additionally, there may be extended family members involved, such as parents, siblings, aunts, uncles, and friends. These people may or may not understand and sympathize with your situation.
- Your employer. It is possible that you can keep your bankruptcy out of your workplace, but it is not likely. Although your employer probably will not admit it, a bankruptcy may affect your ability to obtain promotions or to be entrusted with certain responsibilities (such as handling money or accounts). Of course, the same thing may happen if you do not file and a creditor files a wage garnishment.
For some, or all, of these reasons, you should first explore whether you might avoid bankruptcy.