Bankruptcy should only be considered as a last resort strategy for debt reduction as it has the longest lasting negative impact on credit worthiness. In the US today, there are 6 types of bankruptcies consumers and businesses can qualify for, however, the two most commonly used chapters for consumer are Chapter 7 and Chapter 13.
A Chapter 7 Bankruptcy plan essentially wipes out the outstanding debts owed by a consumer. In a Chapter 13 Bankruptcy, the consumer is required to pay back a portion of the debts owed to secured and unsecured creditors. Depending on the type of bankruptcy that is elected, the bankruptcy will remain on the consumer’s credit report for 7-10 years. Furthermore, most employers also ask if potential employees have ever filed for bankruptcy.
Because of this, a Bankruptcy can have a lasting impact for up to a decade, even after the bankruptcy has been fully discharged. It is for this reason that Bankruptcy, as a debt relief strategy, should be considered very carefully. While a bankruptcy provides short term payment relief and long term debt relief, it may also negatively impact the ability to open new lines of credit, qualify to purchase a new home or automobile and it may also hinder one’s ability to find gainful employment.
Here are a few Pros and Cons to consider before filing Bankruptcy:
- Provides protection from creditors and collectors
- Provides immediate payment relief
- Can wipe out all or most of the outstanding debts
- Allows consumers to make a fresh start with their finances
- Can remain a negative item on the credit report for up to 10 years
- Can make it difficult or impossible to obtain new credit for up to 10 years
- Chapter 13 still requires the consumer to pay back a portion of the debt
- Job Seekers may be required to notify potential employers of their past bankruptcy when applying for a job