Declaring bankruptcy can provide much-needed relief if you are overwhelmed with debt, but it also comes with significant consequences that should not be taken lightly. Understanding these potential consequences is important when deciding if bankruptcy is the right path forward.
One of the most immediate effects of filing for bankruptcy is the hit to your credit score. According to credit experts on Reddit, your credit score could drop by anywhere from 130 to 240 points after filing ([source]). This is because bankruptcy signals to lenders that you are unable to pay back debt.A lower credit score makes it harder to qualify for loans, credit cards, mortgages, and more. It also leads to higher interest rates when you do qualify. You can expect to pay these higher rates for several years after bankruptcy. As one Redditor explained, “I filed Ch 7 bankruptcy 6 years ago and still can’t get a mortgage due to the bankruptcy. It stays on your report for 10 years” ([source]).
In addition to higher interest rates, you may struggle to access credit at all in the first few years after bankruptcy. Creditors view those who have recently filed as high-risk and unlikely to pay back new debts.According to Quora users, even secured credit cards can be difficult to obtain right after bankruptcy. However, this gets better with time as you slowly rebuild your credit ([source]). One user said, “I wasn’t able to get any credit for about a year after my bankruptcy discharge. Eventually I got a secured credit card which helped me start rebuilding my credit.”
The type of bankruptcy you file impacts whether you have to forfeit any property. For example, with Chapter 7 bankruptcy, any non-exempt assets could be liquidated to pay back creditors. This may include things like second homes, rental properties, valuable collections, cash value life insurance, and even retirement savings beyond what is protected by state law ([source]).However, property exemptions do exist to help protect your primary home and vehicles in most cases. The experts at Avvo advise understanding your state’s exemption laws before filing since they can vary significantly ([source]). This allows you to better plan what assets could potentially be at risk in bankruptcy.
Bankruptcy can also negatively impact your career prospects. As one Redditor explained, “I went through a chapter 7 bankruptcy 5 years ago and I am still feeling the sting when it comes to jobs/careers. I wanted to get into finance but because of my bankruptcy, a lot of those doors have closed” ([source]).Background checks commonly look for bankruptcies which could disqualify candidates from jobs in finance, government, management, and other fields. The background check company GoodHire notes bankruptcy often signals irresponsible behavior that employers want to avoid ([source]).While not an absolute bar, bankruptcy presents an additional hurdle to finding a job or advancing your career. It’s important to be prepared to discuss it during interviews if it does appear on your record.
Landlords often review your credit when evaluating rental applications. A bankruptcy filing and the resulting credit score drop can make it much harder to qualify ([source]). Landlords may require a higher security deposit, co-signer, or simply reject your application.According to the legal site Nolo, it is illegal for landlords to have blanket policies rejecting all applicants with a bankruptcy. However, they can still choose to deny your personal application based on your unique credit profile ([source]). Maintaining positive rental references can help offset negative credit history during your apartment search.
While bankruptcy wipes out many forms of unsecured debt like credit cards and medical bills, any debts secured by collateral will continue accruing. Common examples include car loans and mortgages. You must either continue paying these debts or forfeit the assets.If you fail to make payments and lose the assets securing loans, lenders can sometimes sue for any loan deficiency. For example, if you owe $15,000 on a car loan but the lender only recovers $10,000 after repossession and sale, they could sue for the $5,000 difference.Student loans also cannot typically be discharged in bankruptcy except in cases of undue hardship ([source]). Any loans in default at the time of filing will return to repayment status afterwards. If you do not resume regular payments, lawsuits, wage garnishment, and collection harassment can still occur over these unpaid debts.: https://www.reddit.com/r/personalfinance/comments/lb43lk/how_badly_does_filing_for_bankruptcy_affect_your/
: https://www.findlaw.com/bankruptcy/exemptions.html: https://www.avvo.com/legal-guides/ugc/an-overview-of-state-bankruptcy-exemptions: https://www.reddit.com/r/careerguidance/comments/wfh7r0/bankruptcy_and_career/
: https://www.nolo.com/legal-encyclopedia/tenants-right-reject-housing-applicant-based-bankruptcy.html: https://www.findlaw.com/bankruptcy/bankruptcy-and-student-loans.html
Bankruptcy makes rebuilding financial health difficult long after your case is discharged. In addition to the immediate credit score hit, a bankruptcy filing stays on your report for 7-10 years depending on chapter type ([source]). This makes accessing new credit at reasonable rates challenging for nearly a decade.You also lose the ability to receive bankruptcy protections again for many years. There is an 8 year waiting period after a Chapter 7 filing before you become eligible to discharge debts this way again ([source]).This can leave you vulnerable if another financial crisis strikes. It also limits options for negotiating with creditors outside of bankruptcy court since you cannot use a new filing as leverage. Treading carefully with expenses and debt after bankruptcy is key while you work to restore stability.
Given the extensive long-term impacts, most financial experts view bankruptcy as an absolute last resort option after others have been exhausted. According to recommendations on Avvo and LegalZoom, first exploring debt management plans, credit counseling, debt consolidation loans, and negotiation with creditors is wise ([source]). While not always successful, these options may help resolve debts without damaging your credit or limiting future opportunities the way bankruptcy does.If you ultimately decide moving forward with bankruptcy, understanding these consequences allows you to prepare as best as possible. But ideally exploring alternative debt relief methods could help avoid filing altogether. Thoroughly investigate all options before taking this serious legal step.: https://www.reddit.com/r/personalfinance/comments/xhq6s1/how_long_does_chapter_7_bankruptcy_stay_on_your/
: https://www.findlaw.com/bankruptcy/bankruptcy-basics-faq.html: https://www.avvo.com/legal-guides/ugc/alternatives-to-bankruptcy–options-for-debt-relief
Understanding these potential consequences allows you to weigh the pros and cons of bankruptcy and prepare accordingly if you do decide to file. But first exhausting other debt relief options is generally wise to avoid the long-term impacts if possible. If you ultimately file, be ready for the effects on your credit, career, housing, and finances for many years.
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