What to Consider Before Filing Bankruptcy

Some people think of bankruptcy as a trouble-free way to offload a crushing debt burden, and it’s sometimes the initial method they reach for. Well, it may well ease the load, but it’s far from easy and must be the very last thing one should opt for.

While most regulations have made it moderately easy to actually file papers, the process - like any legal proceeding - is far from being straightforward. You will have to justify your application, exposing all your financial records to a judge and opening it to objections by creditors. If you genuinely owe the money, they’re unlikely to settle gladly for 10 cents (or less) on the dollar.

Even if you’re successful, there are many long-term impacts that you may want to think about carefully before taking such a drastic decision.

You will lose every credit card that has outstanding balances, while others may decide to close your accounts. You’ll also find it practically impossible to get a home loan or other big credit line (except possibly at the kind of disastrous interest rates that probably led, in part, to your present situation).

Also, not all debts can be saved by a bankruptcy filing. Student loans, back taxes for the past three years and other selected debts are commonly exempt from bankruptcy protection.

That situation will continue for 10 years, during which you will need to keep up a near perfect credit record for you to work your way back to a positive level of trust. Potential creditors will view any bankruptcy as the most negative decisive factor on any credit report - even beyond a low FICO rate.

In addition, one may actually be required to give up real assets - a boat, expensive jewelry and other valuables - based on when they were acquired. A good number of states make an exception for the primary residence and personal vehicle. If you have secondary property, it may not be saved, however.

Lastly, of course, the bankruptcy procedure itself is not free of charge. Courts always have required fees and hiring an attorney will cost you too. That can add the final straw to an already extremely bad financial condition.

On the positive side, you will be relieved from debt collection efforts (as long as they receive notification). Your income can not be garnished and any foreclosure action will be avoided. By taking steps sooner rather than later, you will start to establish a new credit history that can be better than the previous one.

Since you won’t have access to new credit cards, this can actually work for you. There are several people who simply should not have access to easy credit, until and unless they can change their bad spending habits.

It can serve as a huge wakeup call to improve terrible money management habits. For some, it’s indispensable to hit rock bottom before they find the inner motivation to make large, helpful, lasting changes.

But, hitting rocks is excruciating. Think carefully before you take the plunge.