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Does Bankruptcy Impact Your Life?

Does Bankruptcy Impact Your Life

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The United States Bankruptcy Code allows those drowning in debt to get back on their feet and start anew. While bankruptcy might provide financial relief, it is important to consider the potential impact it might have. 

Does bankruptcy impact your life? Yes, it does, in many ways. These ways include: 

You lower your credit score.

Your credit score assesses your ability to repay debt. Bankruptcy has the greatest impact on your credit score. This is because filing shows that you have not paid your debts responsibly, even if it was due to bad luck (loss of employment) or medical issues. 

The impact on your credit score is severe. If you enter bankruptcy with an average-to-good score (680-to-780), your score could decline by 150-240 points.

You might be wondering how long your bankruptcy filing stays in your records, right?

Well, chapter 7 filings remain on a credit report for ten years. 

A Chapter 13 bankruptcy, on the other hand, can remain on a credit report for up to seven years.

When these timeframes expire, the bankruptcy is legally removed from the credit record. 

While bankruptcy is on your credit report, you must be patient and pay your bills appropriately. 

Bankruptcy on a credit report can impact borrowing, as it is seen by banks, businesses, future employers, and lenders.

While filing for bankruptcy can hurt you, the good thing is that there are several things you can do to ease the impact. These things include: 

  • Make sure that debts pardoned in bankruptcy are listed as dismissed on your credit report. 
  • Check your report, and if there are any errors, contact the agency to correct them. 
  • Use credit cards responsibly and avoid impulse and luxury purchases. 
  • Prioritize savings. Setting aside money for an emergency fund ensures it will be available when needed.

You can lose your property

Loss of property is one of the most serious repercussions of bankruptcy.  

This loss could include non-essential items such as a second home, vehicles, jewels, antiques, and other costly personal belongings that are not required for your job or daily life. 

In Chapter 7, certain personal assets are protected from bankruptcy proceedings. Your home, car, wardrobe, work-related things, public benefits, retirement accounts, and spousal or child support are shielded from Chapter 7 bankruptcy proceedings. 

While you risk losing your property when you file for bankruptcy, many people don’t lose anything. 

Certain exemptions exist under state and federal law to allow you to keep what you need to live, work, and, hopefully, recover financially. The amount of exemption and the types of property that can be claimed as exempt vary by state, but if something is exempt, you should be able to keep it. 

According to the American Bankruptcy Institute, more than 90% of those who file for Chapter 7 maintain all of their property. The notion is that people need to continue working and living in their homes to repay their debts; thus, forcing them out makes no sense.

Each state has its bankruptcy exemption requirements. You should work with your bankruptcy lawyer in Charlotte and find the exemptions in your area. 

Personal property in Chapter 7 that may have to be sold includes a second home, a boat, an additional car, jewelry, or antiques – anything unnecessary for your profession or life.  

In Chapter 13, the Court permits you to maintain your property and assets while repaying your debt in monthly instalments over a 3-5-year period.

What should you do before you file for bankruptcy?

There are several things you can do to mitigate the risks listed above. These things include:

File your taxes. 

When filing for Chapter 13 bankruptcy, the IRS requires you first to file any required tax returns for tax periods ending within the previous four years.

You must also file and pay any required taxes or apply for an extension during the bankruptcy process. If you do not file your return or pay your taxes while in bankruptcy, your case may be dismissed.

Avoid new debt. 

Ensure you don’t incur any new debt in the 70 to 90 days before filing. Intentionally acquiring debt that you do not intend to repay is called fraud, which can negatively impact you.

Attend Credit Counseling. 

You must take a credit counseling course offered by an accredited credit counseling service within 180 days after filing for bankruptcy. The credit counselor will explain the ramifications of bankruptcy and guide you through your options.

Alternatives to filing for bankruptcy

If you feel that filing for bankruptcy will hurt you, there are plenty of other options you can go with. These options include: 

Sell your assets

As mentioned, your nonexempt assets may be liquidated during bankruptcy proceedings, so decide what you can sell before filing. 

You’re more likely to make more money by selling the assets yourself rather than letting them go to a bankruptcy auction, and that extra money could be enough to improve your financial situation. 

Keep all sales documents and charge a reasonable market rate, as selling assets at a low price may raise red flags if you need to file for bankruptcy later.

Consolidate your debt and consider refinancing.

If you have strong credit and want to lower your monthly debt payments, consider a debt consolidation loan. This option is ideal if you can qualify for a loan with a lower interest rate or monthly payments than your present debt.  

While debt consolidation loans are primarily unsecured, secured loans are occasionally promoted as a solution for persons with bad credit. In general, avoiding taking out a secured loan to pay off your unsecured debt is best because it puts your assets in danger. 

If you have high-interest debt, consider refinancing it with your bank at a reduced rate.

Negotiate with your creditors.

Your creditors are interested in recouping as much of your outstanding debt as possible, so they may be ready to work with you to negotiate alternate conditions or payment plans. 

Contact the lender or debt collector to explain your situation. Give a reasonable estimate of what you can afford and when to make those payments. Your creditors may be ready to waive fees or lower your interest rate or monthly payments. 

You can negotiate your debt independently or use a credit counselor, attorney, or debt settlement business. Ensure any agreements are in writing and preserve meticulous records of interactions and payments.