There are many pros and cons of filing for bankruptcy. One of the biggest cons to doing so is that when you file for either a Chapter 7 or a Chapter 13 bankruptcy, it’ll show up on your consumer credit report for anywhere up to the 10 years of your life. Another thing that you’ll want to take into consideration is that if you want to file for a federally backed mortgage loan, some creditors won’t approve you for credit while you’re still in bankruptcy. Others will make you wait until your bankruptcy is at least two years old.
What Happens to Debt Assumed While in Bankruptcy
Rarely will you find creditors who are willing to extend credit to you while you’re still in bankruptcy, but it does happen. One thing that you need to remember here is that once you’re done filing for bankruptcy, any debt that you now assume probably won’t be subject to Discharge in a Bankruptcy. This is important to remember even if your creditor doesn’t make this understanding clear to you when extending you a loan offer.
There is one exception to this rule: If you’re a Chapter 13 debtor and you’re able to convert this into a Chapter 7 bankruptcy. With this conversion, you’re able to schedule certain debts that you acquired after you filed for your Chapter 13 bankruptcy for discharge.
How Filing for Bankruptcy Affects Your Credit Score
It’s a gamble when it comes to how a bankruptcy will affect your credit score. Sometimes it’ll hurt your credit score, but then some clients file for bankruptcy and watch as their credit score dramatically improves. Most clients will see their credit improve within two years of filing for bankruptcy, though.
There are some instances in which bankruptcy will greatly improve a person’s credit. For instance, if you have a Chapter 7 bankruptcy discharged, your dischargeable debts will be eliminated through your bankruptcy. Reducing or eliminating your debts will typically dramatically increase your debt-to-income ratio (a factor that plays an important role in determining your credit score and rating).
The Benefits of Filing for Bankruptcy
There are some clear advantages available to many debtors when they choose to file for bankruptcy. Some of these advantages include:
- Bankruptcy’s automatic stay will stop foreclosure on any real property (e.g., homesteads).
- Usually, filing bankruptcy will stop collection activities such as wage garnishments and lawsuits by even those really aggressive creditors such as the Internal Revenue Service (IRS).
- As a debtor, you may only need to pay the true value of your car. Any of its negative equity would then be forgiven through your bankruptcy. You may even be allowed to refinance your vehicle. This would then dramatically reduce the amount of interest that the original automobile loan agreement required you to pay.
The Drawbacks of Filing for Bankruptcy
Now before you start to think that there aren’t any drawbacks to face when you file for bankruptcy, here are a few things that you should know about:
- Your future finances may be affected because bankruptcy can remain on your credit report for up to 10 years. During that time, you may not be able to get a mortgage or car loan.
- Not all debts are dischargeable. Things that can’t be discharged include student loans, income taxes, alimony, child support, and divorce settlements.
Deciding What’s Right for You
As you can see, you avail yourself of many pros and cons when you choose to file for bankruptcy. That’s why this is such a big decision for many people. What’s best for you will depend upon the facts of your particular case. For help making this determination, contact us at the Weller Legal Group in Clearwater, FL, today.
Picture Credit: Freepik