Guest Post by Miranda Marquit
Filing for bankruptcy is normally a very difficult decision. While there are those that file for bankruptcy in an attempt to avoid paying their obligations, many bankruptcy filings come after months of agonized consideration as a person attempts to gain relief from a debt situation that has become untenable. One of the main causes of a bankruptcy file is medical bills; these expensive obligations can often push someone over the edge. However, even if you feel that bankruptcy is the only way out for you, it is important to carefully consider your options, since a bankruptcy has far-reaching effects on your financial history.
Discharging your debts
The point of bankruptcy protection is to discharge some of your debts to creditors. However, if you have secured debt (a home or a car), you have to reaffirm that you plan to pay this debt if you want to keep the item in questions. As long as you are current on your mortgage or car payments, and you reaffirm that you will continue to make payments on this debt, these possessions will remain with you. (Note: This is why it is so important to make payments on your secured debt before your unsecured debt.) For smaller items, such as computers or TVs from rent-to-own places, creditors have the right to ask for the item back — especially if you have been using credit cards to make your regular payments.
After you have reaffirmed your secured debt, you and your attorney will meet with a trustee who will review your other debts. It is important that you are honest with the trustee about your debts and your financial situation. Additionally, you should avoid applying for new credit, or using credit for purchases once you file for bankruptcy. The court wants to see that you are attempting to get back on your feet. Applying for a new credit card can scuttle your case. The trustee will make recommendations as to how much of your debt should be discharged. It is important to note that when you file for bankruptcy, it does not automatically mean that all of your debt will be forgiven. The court may order you to make smaller payments to repay part of your obligations to creditors, depending on your financial situation and what you can afford. Also, federal student loans are never discharged during bankruptcy. You remain responsible for those.
It is worth noting that when you file for bankruptcy, your creditors are no longer allowed to contact you. This is important. They can no longer call you, trying to collect on the debt. If they do call you, let your attorney know so that the offense can be dealt with properly.
Bankruptcy file and your credit score
Bankruptcy can have a devastating effect on your credit score, lowering it anywhere between 300 and 600 points. Additionally, a bankruptcy will remain on your credit report for up to 10 years. This can make it difficult to borrow money in the future. While you can usually buy a home two to four years after a bankruptcy (depending on whether your credit is improving), you will probably not be eligible for the best interest rate. You may also have difficulty getting auto loans at good rates, and your credit lines will be restricted when you open credit card accounts. You might need to use secured credit cards for a time to help build your financial reputation again.
If your bankruptcy was the result of a some sort of financial catastrophe (medical problems, job loss and a long period of unemployment, etc.), you can add that as a note in your credit history. This can be entered electronically at the web sites of the three major credit bureaus. You may also be required to provide a letter describing the events that led to your bankruptcy, as well as the steps you are taking now to build a more secure financial foundation.
Bankruptcy file is not the end
While a bankruptcy is not the end of the world, and while it may be the only option in some cases, it is important to understand the impact it can have long-term, as well as understand that it is far from a free pass.
This is a guest post Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.