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Filing Bankruptcy - The Downside

 


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Depending on your current financial situation, bankruptcy might seem like the only answer. While in many cases this may be true, there are other solutions which might prove to be the better choice.

The biggest downside to bankruptcy is the fact that it remains on your credit report for up to 10 years. During this time it will be much more difficult for you to establish a positive credit history. Many credit applications ask if you've ever filed bankruptcy, so even if the 10 years have passed and it's not on your official credit report, you have to answer yes.

While your credit report will drop the bankruptcy after 10 years, the federal court has it on record forever. Those records are open to the public.

Your credit report can be checked when you apply for employment so a bankruptcy can affect your ability to get a job in some industries. Car insurance companies look at your credit score as a measure of reliability. A bankruptcy is looked at unfavorably and can result in denial of insurance, or insurance only provided at very high rates. When moving, it can even be the deciding factor in whether or not you live in the residence of your choosing. Many apartment leasing companies won't approve a lease to a person with a history of bankruptcy, even if they have the financial ability to now make the lease payments.

Another downside to bankruptcy is the cost. Recent changes in bankruptcy laws have initiated a huge increase in filing fees. While it's possible to file a bankruptcy without an attorney it's not recommended in complicated cases. Certain debts such as student loans and back child support can not be erased. Add the filing fees to the cost of retaining a bankruptcy attorney and you are talking about fees probably in excess of $2000.

If you have equity in your home you may not be able to retain it but be forced to sell the home to pay off debts. While your debts may be high, if you have substantial assets it may be financially advisable to not declare bankruptcy.

One of the conditions of the 2005 changes in bankruptcy law now requires individuals to seek credit counseling prior to filing. If at all possible, you should consider using a credit counseling agency or even a debt consolidation service before deciding to go bankrupt. The credit counseling service must be government approved to satisfy this requirement.

Other changes require that if you can pay at least $100 per month towards debt payment you must file Chapter 13 instead of Chapter 7. Chapter 7 means all your debts (with the exception of back child support, taxes, and a few others) are forgiven and you come away with a clean slate. Chapter 13 requires that you come up with a strict repayment schedule based on your income and assets to pay off as much of your debts as possible within a 5 year period.

You will find yourself on the road to good credit much sooner, if you can utilize a method other than bankruptcy to help you get out of debt.

Corey Landis contributes to several websites including Credit Card and Debt Management and Loans

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