Though several options exist for people who undergo the process of clearing their personal debts, sometimes bankruptcy is the best course of action in regard to repairing poor financial circumstances. When you file for personal bankruptcy, you legally declare that you are unable to repay your creditors and need to be released from all of your debts. The bankruptcy process involves both short-term and long-term financial implications, which may vary according to the type of bankruptcy that you petition for.
Types of Personal Bankruptcy
The two types of bankruptcy under which individuals can file are known as Chapter 7 and Chapter 13. The differences between these personal bankruptcy chapters are defined as follows:
Chapter 7 bankruptcy is a process that results in creditors no longer having the right to collect on your debt. When you file Chapter 7, you are asking that all of your debts be discharged as you do not have the means to repay them. If you have any liquid assets, such as savings accounts, these may be awarded to your creditors as a partial debt repayment.
Chapter 13 bankruptcy allows you to establish a long-term repayment plan. If you file Chapter 13, you are responsible for making payments to the court over a three-year to five-year period. In turn, the court repays your creditors and you are released from any outstanding debts when the payment plan ends.
Short-Term Implications of Filing for Bankruptcy
These are some immediate effects of filing for Chapter 7 or Chapter 13 bankruptcy:
- Calls from creditors will cease. One bright spot in having to file for bankruptcy is that you will no longer have to communicate with creditors. Under the law, they are no longer allowed to attempt contact through the telephone or other means.
- Qualifying for loans may be difficult. A recent bankruptcy filing can significantly impact your likelihood of securing a home or car loan with an affordable interest rate.
- Re-establishing credit will be a complicated process. Though you may see improvements in your credit score within several years of filing for bankruptcy, you are likely to struggle with obtaining credit and paying high interest rates in the meantime.
- You may have some expenses to settle. While you are no longer responsible for your previous debts, you may have to pay trustee and attorney fees as a result of declaring bankruptcy.
Long-Term Implications of Filing for Bankruptcy
These are some potential long-range consequences of a Chapter 7 or Chapter 13 bankruptcy:
- Your bankruptcy filing will be listed on your credit report. If you file for a Chapter 7 bankruptcy, this information can be accessed on your credit report for ten years afterward. In the case of a Chapter 13 bankruptcy, this information is only available for a period of seven years after the filing.
- Your bankruptcy status may come to light as you seek employment. Keep in mind that potential employers may ask if you have ever filed for bankruptcy even if your credit has recovered over the years.
- Life insurance policy applications may be affected by your bankruptcy history. Some life insurance companies ask that you divulge any history of bankruptcy throughout your lifetime and determine your policy eligibility accordingly.
Though the process and aftermath of filing for bankruptcy are often stressful in an emotional sense as well as a financial sense, many helpful online resources are available to guide you in the proper direction. For instance, bankruptcyadvice.co.uk is a comprehensive website that can answer any questions that you may have about bankruptcy and its ramifications.