There are many realities of bankruptcy. Filing bankruptcy can provide a fresh start and get creditors off your back. But it's important that you understand how the process works, and you need to understand the consequences. It might seem like an easy fix to debt problems, but there are seven harsh realities of bankruptcy.
1. You Might Have to Repay All of Your Debt
The fact that you might have to repay your debt is one of several harsh realities of bankruptcy. Many people assume filing bankruptcy will eliminate all of their debt. This is possible, but it doesn't always happen this way. In many instances, a bankruptcy re-structures the debt and many people who file pay back a percentage to their creditors.
2. It is Expensive
Bankruptcy isn't free or cheap. You need to work with a lawyer to file a bankruptcy petition. The cost of a bankruptcy varies depending on where you live, but you should expect to pay several hundred dollars. Coming up with this money can be challenging, especially if you're filing bankruptcy after a job loss or because you don't have disposable income. Fortunately, many lawyers offer payment plans to help people who need assistance.
3. Stays on Your Credit Report for up to 10 Years
A bankruptcy can stay on your credit report for up to seven or 10 years, depending on whether you file a Chapter 7 or a Chapter 13 bankruptcy. On a positive note, the effects of a bankruptcy aren't as severe as time progresses. So while your credit score may drop as much as 250 points after filing bankruptcy, most people recover within 2 to 3 years and rebuild their credit score.
4. You May Not Qualify for Loans
Some lenders will give a loan after a fresh bankruptcy. But for the most part, qualifying for financing will be extremely difficult until you've reestablished your credit, which can take a few years.
5. You Might Get Hit with High Rates
Even if you locate a lender that's willing to give you a loan after a bankruptcy, you'll pay high interest rates, increasing your monthly payments. After a bankruptcy, you're better off saving up and paying cash for items.
6. Your Job Might Be in Jeopardy
Filing bankruptcy can put your job in jeopardy. Of course, this doesn't always happen, it depends on where you work. But if you work for a government agency or hold a position in the finance industry, good credit might be a requirement for employment. And if you're applying for new jobs, some employers require a clean credit history.
7. Insurance Companies Might Charge Higher Premiums
A bankruptcy doesn't only impact your ability to get financing. If you apply for insurance, some insurance companies will charge a higher premium because of your bad credit history. From their viewpoint, a person with good credit is more likely to make on-time payments. You might be able to negotiate a lower premium if you pay the policy upfront for six months or 12 months.
A bankruptcy can have a detrimental effect on your credit history, but it's not the end of the world. Recovery is possible, but you'll deal with the consequences of a bankruptcy until you raise your FICO score. What are other harsh realities of a bankruptcy?