People become bankrupt when they cannot settle or pay their debts obligations. In most jurisdictions, the order of bankruptcy can only be imposed by a court of law. This order is mostly initiated by the debtors themselves when their debt becomes too large compared to their income. Although being declared bankrupt will give you reprieve by preventing your creditors from pursuing you to settle your debt obligations, this state may compromise one’s financial status and future success. Anyone should think twice before taking the step of filing for bankruptcy. It is a process that can prove to be tedious and very risky at the same time. Even though your application for bankruptcy can be successful if you have the right lawyers, you risk losing your property to repay the debts. Check this if you want to file for bankruptcy. This article will shed some light on the downsides of filing for bankruptcy which you should consider before taking any step further.
Cancellation Of Credit Cards
A credit card enables the owner to make purchases without spending any amount of cash. Rather, the owner borrows some funds from the issuing company, which is normally a bank, to make purchases by using a credit card.
If you are declared bankrupt, the credit card companies may automatically cancel any card you hold. To cushion you to some limited extent, the issuing company may perhaps give you some offers to acquire unsecured credit cards after your filling. This can assist you in re-creating your creditworthiness, but it often comes with a caveat: annual fees and high interest rates.
Your Credit Score Is Negatively Affected
Your credit score shows your likelihood of repaying a loan and making timely payments. Lenders use information from your credit report to calculate your credit scores, such as your repayment history, the types of loans you’ve had, the length of time you’ve had each line of credit or loan, and the total amount of debt you owe. Creditors use credit scoring systems to establish if you would be a reasonable risk for credit cards, auto loans, and mortgages.
Credit scores also may affect the terms of credit you get. A higher credit score portrays you as less of a financial risk to lenders, making you more likely to get credit. You will also enjoy lower interest rates. Chapter 7 bankruptcy can stain your credit report for ten years, while Chapter 13 can affect the report for up to seven (7) years.
Difficulty Obtaining A Mortgage Or Loan
Mortgage lenders use credit scores to hand out loans. Due to the long-term effects that a low credit score has on someone’s financial life, it is safe to say that when you file for bankruptcy, it can hinder you from getting another loan or mortgage for many years.
The credit facilities available in such a case may be too expensive to undertake.
Loss Of Property And Real Estate
Depending on the weight of the petition, all personal property and real estate may not be exempt to seizure. This means the bankruptcy court could seize some of your property and sell it to pay your creditors. On other hand, if the court fails to rule in your favor you may lose all that you own.
Denial Of Tax Refunds
Tax refunds mean that you mistakenly paid more income tax than necessary. The federal or state government will refund the excess money you paid them. You can avoid overpaying by filling out the Employee Tax Form correctly and estimating or updating your deductions more accurately. Although you might think that this additional income is free money, it is more like a loan you provided to the IRS, without interest. However, if you underestimate the tax amount, you will owe the government money. When you file for bankruptcy and are successful, you will not be eligible for state, local and federal tax refunds.
Job And Housing Stigma
Some potential employers require credit scores and will inquire about any filled bankruptcies. This may put a job you have qualified for at stake. It is advisable, therefore, to negotiate with the creditors before even filing for bankruptcy.
Some landlords require proof of financial capability to know whether you will be able to remit their house rent on time. They may ask for recently filled bankruptcies. If it turns out that you filed for bankruptcy in recent times and were successful, it will affect your chances of getting a house since the landlord may see you as a risk. This just shows how bankruptcy can have a far reaching effect in your life.
Most people seek bankruptcy relief so as to start over without the weight of all those debts hanging on their head. Although you can forgo a large amount of debt during bankruptcy, certain obligations (known as non-forgivable debts) still exist after the bankruptcy is discharged.
Forgivable debts are obligations that can be eliminated through the discharge of your bankruptcy. When you receive the disclaimer, you are no longer obligated to pay any of these debts, and creditors cannot recover these debts. A few examples of dischargeable debt include:
- Credit card debt
- Medical bills
- Personal loans made by friends, family, and others
- Past-due utility bills.
- Student loans(you have to argue that payment of this debt causes undue hardship)
- Criminal restitution and fines and
- Debts acquired through fraud.
Are you thinking of filing for bankruptcy? It is then critical to consider all the shortfalls listed here to be safe. Although it can assist in getting a bit of peace of mind when you want to start afresh, it requires serious consideration beforehand.