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Bankruptcy
isn't right for every debt problem. While bankruptcy is a fantastic solution
for most people facing serious debt, other options are available that should be
used depending on the circumstances. So what are the disadvantages of
bankruptcy? There are three disadvantages as to why bankruptcy may not be a
viable option.
- Hit to Your
Credit Score -
First, a
bankruptcy will remain on your credit record for seven to ten years after the
discharge and can affect your future finances. However, most people in a
bankruptcy situation are already have poor credit - making credit a typical
non-factor. A bankruptcy is often looked upon by debtors as a step in the right
direction. Credit card companies will typically offer credit almost immediately
after bankruptcy.
Unfortunately,
the interest rates can be incredibly high - to upwards of 20% or more. Other
issues might crop up if you start a business within a few years of bankruptcy
and want to obtain business loans through your own name. Again, those with
crushing debt probably won't be looking at obtaining business loans anytime in
the near future anyway.
- Obtaining
Future Loans -
The second
disadvantage of bankruptcy is you may be impeded from being able to obtain a
home or car loan - or a refinance of a home kept during a bankruptcy. The hit
is not dramatic considering the typical benefit.
Most people
become eligible for a mortgage or refinance two years after a Chapter 7, or 1
year after a Chapter 13 payment plan ends. If your situation allows you to
carry a car or a single home loan through a bankruptcy, your credit will rise
much faster.
Obtaining
quality used cars even immediately after filing is actually quite easy. There
are some upstanding used car dealers who cater to people just out of
bankruptcy. You have to look around for a good one though, since some will sell
you lemons. A bankruptcy attorney may help you find a dealer who can get you
into a quality car for a fair monthly price. I've personally helped people get
into cars the weekend after their bankruptcy was filed... so its very possible
in many situations if you do have a full time job.
- Too Many
Non-Dischargeable Debts -
Finally, not
all debts can be discharged. Student loans typically cannot be erased. Child
support, alimony, divorce settlements and some income taxes cannot be
discharged. If the majority of your debt is made up of non-dischargeable debt,
it may be better to use an alternate means of debt reduction.
If most of the
debtor's debts are not dischargeable in bankruptcy, then a bankruptcy may not
be beneficial at all. Debt negotiation or short sales may be better for student
loan debts, mortgages, or other secured debts.
- Conclusion -
For those in a lot of debt ($10,000 or more), then
bankruptcy is an amazing and under-utilized solution. Bankruptcy is not
effective in every situation, so make sure you ask around and find out as much
information as you can for your own specific situation. Both bankruptcy
attorneys, credit counselors and credit consolidators will all try to sell
themselves on every debt - so ask around to find the upstanding and honest
ones.
Do not overlook the importance of
having a lawyer by your side throughout the process.
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