What They Don’t Tell You About Bankruptcy

Bankruptcy advocates would like you to believe that simply filing for Chapter 7 or Chapter 13 bankruptcy is the miracle solution to all of your debt problems.

Indeed, the way bankruptcy is sometimes portrayed, you’d think an attorney would just fly in through your front door with their magical wand and whisk away all your debt problems while you just sit back and relax.

While bankruptcy can be beneficial in times of financial distress, filing is far from easy and can put you at a financial disadvantage in a number of ways.

Attorneys often tout bankruptcy as a quick and easy way to get out of debt, but they downplay some of the serious long-term consequences that it can cause.

Before you decide if bankruptcy is right for you, consider these seven realities first:

#1: It Will Remain on Your Credit Report for Years

A Chapter 7 bankruptcy may only take four to six months to complete and excuse you from many debts, but don’t think that all your problems will be solved. A bankruptcy filing will remain a stubborn scar on your credit report for seven to 10 years, which can have a devastating effect on your ability to obtain credit in the future.

#2: Bankruptcy Filing Becomes Public Domain

Bankruptcy is a legal procedure, which means when you file for bankruptcy, it becomes public record. That means your name and other personal information will appear in court records that the public (including businesses, banks, clients or even potential employers) may access. 

#3: Filing Doesn’t Erase All Debt

Bankruptcy can get rid of unpaid income tax bills that are more than three years old, but if you haven’t paid Uncle Sam for more recent taxes, be prepared to shell out the cash. Your student loans won’t be going away, either.

Bankruptcy courts have the power to eliminate many unsecured debts such as medical bills and credit card balances, but student loan debt must still be repaid in full (unless you participate in one of the federal government’s loan forgiveness programs).

#4: Filing Is Expensive for Those Without Money

You file for bankruptcy because you don’t have enough money to pay for mounting bills and debt. The problem is, a Chapter 7 or Chapter 13 declaration requires extensive legal representation, and the services of a bankruptcy lawyer aren’t cheap.

Rates vary by location, but a Chapter 13 bankruptcy filing can take as long as three to five years to settle, with attorney fees costing anywhere between $2,200 and $3,200. Filing for Chapter 7 bankruptcy is slightly less expensive due to the attorney’s smaller role, but will still cost anywhere from $800 to $2,500 depending on the area.

#5: Finding a Decent Home Loan

In a lending environment where banks are already skittish about loaning anyone money for a home, it hardly comes as a surprise that bankruptcy filers face even tougher challenges in landing a mortgage loan.

According to the Home Buying Institute, it can take a recent bankruptcy filer one to four years before they’re approved for another mortgage loan. Even the Federal Housing Authority requires applicants to wait at least two years after declaring bankruptcy before can they apply for a FHA home loan.

Even if a recent bankruptcy filer was lucky enough to nab a home loan under their circumstances, they probably wouldn’t want to keep it after seeing the interest rates they’re offered. If your credit score is below 500 after you’ve filed for bankruptcy, you can expect to pay an interest rate of 6.25% to 6.50% above the prevailing rate. So, if a borrower with good credit lands a mortgage rate of 4.00%, your interest rate as a bankruptcy filer would be closer to 10.5% for the same loan.

The offered rates may become more attractive as your credit builds, but the cost will almost always be higher than for non-bankruptcy filers; Something to consider if you are contemplating buying a home anytime soon.

#6: Good Credit Card Offers Will Be Hard to Come By

Credit cards, contrary to what you might believe, are not impossible to obtain after you’ve filed for bankruptcy. In fact, during the second quarter of 2011, an astounding 53.5 million credit card offers were sent to households with bad credit. But any recent filer looking at the fine print of one of these offers, however, would see the catch: the interest rates and fees are dramatically higher for those with bad credit than for the average consumer with decent credit. 

Credit card companies aren’t stupid; they know that even the riskiest of borrowers are worth taking a chance on if it means they’ll pay the hefty interest payments and fees.

#7. Missed Payments Under Chapter 13 Can Be Devastating

If you fail to make payments in a Chapter 13 bankruptcy, the trustee in the case will either convert the bankruptcy to Chapter 7 bankruptcy liquidation, or the case will be dismissed altogether. Either option is disastrous.

If your bankruptcy is converted to Chapter 7, all of your non-exempt property — family heirlooms, bank accounts, investments, second cars and vacation houses, just to name a few — will be sold and distributed to your debtors. If the case is dismissed, you will lose all bankruptcy protection and go back to square one, still liable for all your debts.

Bankruptcy is not something to take lightly. There are thousands of people who have successfully emerged from bankruptcy, but it is vital to be informed of all the risks and benefits. Don’t let a bankruptcy filing take you by surprise.

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