The Consequences of a Bankruptcy Filing – Part 1 of 2
Bankruptcy is Not a Get Out of Jail Free Card
Filing a bankruptcy petition is serious business. Bankruptcy can give you a fresh start. It can wipe out some debts, prevent most creditors from taking collection action and even stop foreclosures or repossessions long enough to reorganize financially and get back on track.
But, bankruptcy is not a get out of jail free card. You may have to surrender some of your property or assets. Bankruptcy will stay on your credit report for 10 years and will make it more difficult and / or more expensive to obtain new credit. It may be more difficult to buy a home, rent an apartment, or buy a car. You will be considered a more of a risk in any loan request. Your credit cards will be cancelled if you file for bankruptcy. You will receive offers for new credit cards, but with higher interest rates. Bankruptcy is a matter of public record. The debt consolidation industry has made “dirty word” when it certainly should be. It is merely an arrow in your financial quiver that sometimes needs to be used.
What Could a Bankruptcy filing impact
The impact of bankruptcy is different for everyone. The consequences could be more impactful for some than for others. You could lose property, impact your credit score, etc. You should talk with an experienced bankruptcy attorney to discuss your concerns in your specific area and laws in Ohio.
Loss of Property
You may have some property that is not “exempt” and therefore lose it to creditors. These assets would be turned over to a Bankruptcy Trustee who can sell them to help repay your creditors some of the money that they are owed. Household items and furniture are mostly exempt due to its value and exemptions. Most persons filing bankruptcy do not have to turn over ANY property to the Trustee. You should consult an experienced bankruptcy attorney to advise you.
To protect assets, individuals who file for bankruptcy may opt to file under Chapter 13, which ordinarily does not require liquidation of assets.
Assets may be better protected in a Chapter 13 bankruptcy. However, this may require repayment of some or all debts. The terms of prior loans may be modified in a Chapter 13 bankruptcy. A Chapter 13 plan requires a highly experienced attorney to prepare a repayment plan. Many cookie cutter attorneys, who boast about the number of filings, can be disserving their clients in developing a Chapter 13 plan.
Even in Bankruptcy, you will continue to pay the secured debts of property you wish to retain. Mostly, this means homes, and automobiles. However, in a Chapter 13 these repayment terms may be modified if the loan meets certain qualifications.
Impact on Credit Score
This should not be your biggest concern if you are considering bankruptcy. If you are seriously considering bankruptcy, you are in serious financial trouble. The credit score is merely a number used to determine your risk to a creditor to borrow MORE money.
Your credit score is data, about you, that has been collected by credit reporting agencies or “credit bureaus.” The credit reporting agencies provide this information to other creditors and other entities wanting to know how you manage your money. Lenders review your credit history when deciding whether to lend you money.
Most lenders use a particular method to generate a “score” that helps them determine if you are a good credit risk. This is called a “credit score”. This is your FICO score. Your FICO score summarizes the information in your credit score and delivers your credit risk depiction at any particular moment.
When you file a bankruptcy petition, it is listed on your credit report for 10 years. Any time you apply for credit, the potential lender will know that you have filed for bankruptcy. That isn’t always a bad thing, as they see that you have rectified problematic debt. It also means that you cannot discharge future debt through bankruptcy for 4 to 8 years. However, they decide that lending you money involves a greater deal of risk. They may deny you credit (often the case for home loans in the two years after filing bankruptcy). They may also charge you a higher interest rate to account for their greater risk of non-payment.
If you are considering bankruptcy, you have likely already hurt your credit score through slow payment, no payment, repossessions, and lawsuits. A bankruptcy filing will have minimal or no practical impact on your current score. It is like a bomb going off on an already bombed out field. It does however, “clear the field” to allow grass to grow again.
May Effect Credit Going Forward
You may end up paying more for credit in the next few years after a bankruptcy filing, but most filers have a much better credit score two years after filing than a person who continues in their current circumstance. Major purchases of a home or automobile should be delayed two years post bankruptcy filing.
There are lenders who do lend to recent bankruptcy filers. We have helped Debtors obtain home loans in less than 9 months, but that is a rarity, and not advised. These loans will have higher interest rates and fees. If you decide to file for bankruptcy, don’t borrow more money quickly, especially, expensive (high rate) money.
We often suggest that Individuals who have been in bankruptcy utilize a “secured” credit card. It is really just a prepaid credit card that has a low limit. We recommend that you replenish it every month and help build credit. You will often see that utilities and others will charge a higher than normal security deposit if you have a recent bankruptcy filing or low credit score.
You may also see that your credit score increases significantly faster than if you had not filed bankruptcy. Many people file bankruptcy just so that in a few years they will have a credit score that is better than what they could have achieved if they had not filed for bankruptcy.