Wouldn’t it be nice to wipe away your debts and file for bankruptcy? Sure, your credit report will take a hit, but you’ll get past it … right? Well, actually you might want to think twice before taking this route. Here’s some information you need to know.
Types of Bankruptcy
As an individual, you likely will file for one of the following:
- Chapter 7 bankruptcy, in which a court-appointed trustee essentially sells most of your valuable possessions to pay your debts, or
- Chapter 13 bankruptcy, in which you can keep your property and pay off your debts according to a court-approved repayment plan.
Depending on your eligibility, other bankruptcy options may be available to you.
What Bankruptcy Doesn’t Address
If you file for bankruptcy, it will not erase some kinds of debt. Among these are:
- Most tax debts
- Student loans (with rare exceptions)
- New debt incurred after the bankruptcy
- Payments for alimony or child support
- Debts to others as a result of personal injury from intoxication
- Fines or penalties due to government agencies
Also, when you file bankruptcy, any debt forgiveness does not extend to others (such as a parent or spouse) who has co-signed on your borrowings. So, even if you relieve the debt, your co-signer is still responsible.
The Long-Term Impacts of Bankruptcy
Although filing for bankruptcy can help wipe away your debts, it can have longer-term impacts.
- A bankruptcy filing will stay on your credit history for seven to 10 years although this might not affect your ability to get credit.
- Your credit report will be marked as “charged off” for any accounts filed with the bankruptcy.
- Insurers, employers, landlords and anyone else who pulls your credit report may see your bankruptcy as an indication of mismanagement.
- If you can obtain credit afterward, you may be charged higher interest rates, asked for higher down payments or asked to put up collateral until your credit is repaired.
Following a bankruptcy, you will need to be diligent to pay your debts on time, every time, for a long time to help rebuild your credit history.