The Long-Lasting Effects of Bankruptcy


The side effects of bankruptcy include sighs of relief, reduced stress, increased disposable income, a new respect for budgeting, a long-term financial plan that includes retirement, preservation of life. ; savings, improved self-sense, improved sex life, controlling finances, improving credit scores, to name a few. Stop there. I know you are probably saying "how is my credit rating improving?" It seems illogical that a credit score is likely to increase due to filing for bankruptcy, but let me explain.

Credit scores are based on so many factors in the FICO scoring system which basically include the number of business lines (how many credit cards etc you have), the balance owed against the credit limit, the collections and late payments, invoiced off accounts, judgments, etc. In bankruptcy, we eliminate the debt. The effect on the credit report is an improvement in the overall score because you no longer carry high balances on lines of credit. Even though the act of filing for bankruptcy leads to a decrease in credit rating, the improvement in the rating comes from eliminating debt. Many customers begin to receive offers of credit immediately after completing their bankruptcy case because creditors know two things: (1) that you have a taste for credit; and (2) you cannot declare bankruptcy for another eight (8) years. It is possible to rebuild and get credit after bankruptcy.

Where bankruptcy may not help

Bankruptcy doesn't necessarily erase all financial responsibilities. If you've fallen behind on those debts, a court-approved debt repayment plan under Chapter 13 of the Code can help you catch up on your bills. It usually does not discharge the following types of debts and obligations:

  • Pension
  • Child support
  • Debts that arise after bankruptcy is filed
  • Certain debts contracted in the six months preceding the filing of bankruptcy
  • Loans obtained fraudulently
  • Debts resulting from bodily injury while driving while intoxicated
  • Debts resulting from intentional and malicious injury to persons or property
  • Certain student loans
  • Certain taxes

In conclusion, bankruptcy is a powerful tool to help you regain financial control either with a court approved repayment plan or complete debt elimination without repayment. Bankruptcy can save time and resources to pay bills. For example, you can keep your home, car, and retirement accounts while getting rid of your debt. You can remove the liens on your home, pay off all or part of your debts without interest. The side effects of bankruptcy can far outweigh the long term effects of doing nothing or taking more than five (5) years to get out of debt.

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