Some individuals who are struggling with mounting bills and a negative debt to income ratio may feel that filing for bankruptcy is an easy and quick solution. While the fast fix that bankruptcy seems to provide may be enticing, it is rarely a miracle solution to personal financial problems. Although in certain situations it may be the only option, one should not flippantly decide to pursue this course of action. There are multiple consequences of bankruptcy and once an individual has taken this option there is no turning back. It is for this reason a person must carefully research the myriad pitfalls associated with bankruptcy as well as examine any options through which this process might be avoided.
A Last Resort
What leads many people to consider bankruptcy is finding themselves at a point where it appears no financial hope exists. In such cases, bankruptcy does provide relief from burdensome debt that one cannot realistically expect to pay. However, it also results in permanent consequences, many of which are unfavorable.
Pros and Cons of Going Bankrupt
While it is not an ideal avenue through which to eliminate debt, bankruptcy will stop most of the phone calls and letters that those struggling with uncontrollable bills regularly receive from creditors. In most bankruptcy cases, the filer’s creditors are notified in writing that court proceedings are underway and are advised to cease collection activity. This is the aspect of bankruptcy that is regarded by some as a benefit, but unfortunately, there are more negatives than positives associated with the process.
Professional and Personal Reputation
One of the most detrimental aspects of going bankrupt is the negative influence it has on the client’s personal reputation. Someone who chooses this option can expect to have his or her name published in local newspapers and sometimes even online. Therefore, if the filer had previously managed to keep his or her financial troubles private this will no longer be the case. Essentially, a person must prepare to have his or her money troubles made public when bankruptcy is chosen. For some, this may not be a vital consideration, especially if they were previously very open about their situation to friends and colleagues. However, those who hold certain positions at work or in the community may find it extremely embarrassing to have their personal financial difficulties publicly exposed.
Obtaining Credit in the Future
In addition to personal embarrassment, there are serious considerations concerning one’s financial future to which thought must be given. Many people who file bankruptcy are convinced that once their day in court is over, they can simply continue their life debt-free. While there may be some truth to this, there are still considerable repercussions one must face in the future as a result of his or her bankruptcy. For example, after one has gone bankrupt, obtaining loans can be difficult and in some cases entirely impossible.
If a bankrupt individual wishes to buy a home or apply for a personal loan, he or she must prepare for a long wait. Until the bankruptcy is discharged there is not much hope of borrowing money at a reasonable rate of interest and until he or she re-establishes credit, most financial institutions will not even consider lending the individual money. In addition, when one is finally able to qualify for a loan, the record of the bankruptcy may result in his or her having to pay a much higher interest rate than would be assigned to a person who has never gone bankrupt.
At some point, a bankrupt individual should make an attempt at re-establishing credit, which can be a long and unwieldy process requiring a substantial amount of patience on his or her part. Acquiring a secured credit card is typically the first step a bankrupt individual takes when attempting to achieve a good credit score. A secured credit card is issued by a financial institution after the card holder deposits a certain amount of money into the account as collateral. Purchases are limited to this amount and the goal is to begin a positive payment record which will be reflected in one’s credit report. This can eventually result in the debtor becoming eligible for non-secured credit cards or other loans.
Re-establishing a good reputation and a favorable credit rating can be tedious and time-consuming and it is for this reason an individual must carefully consider the ramifications of filing bankruptcy before choosing this option. The consequences of bankruptcy can be devastating and long lasting to a person’s financial future and those who are unsure if it is a wise option to pursue may wish to seek legal advice before making a final decision.