The Negatives of Bankruptcy

Though bankruptcy does hold the promise of several significant advantages, like so many other things in life, it also has more than its fair share of drawbacks. Thus, deciding whether or not to even declare bankruptcy is a highly personal decision, typically made by comparing its pros and cons and weighing the relative importance of each of them. There are many important things to remember about the disadvantages of bankruptcy, and one of those things is the fact that you can recover from its negative impact over time. As a matter of fact, many people do ultimately achieve even greater financial health after a bankruptcy than they had ever experienced before.

Damage to Your Credit Rating

One of the most significant negative consequences of bankruptcy is the fact that it will do significant damage to your credit rating. In fact, a bankruptcy will show up on your credit report for ten years. During those ten years, there will be certain types of loans which you will be unable to get it. Furthermore, the only types of loans you will be able to get will have high interest rates attached to them, which means that they will likely cost you quite a bit of extra money in the long run. Of course, this could be a blessing in disguise, because it will be a real deterrent to the abuse of credit.

It Might not Free you From Debt

Another potential negative consequence of bankruptcy is that it night not free you from debt to the extent which you think it will. That is because certain types of bankruptcy do not actually result in the discharge of your debts. These types of bankruptcy can more accurately be described as restructuring your debt. Even bankruptcies that do result in the discharge of your debts do not typically allow for student loan and tax debts to be discharged. Therefore, it is quite common for people to go through bankruptcy proceedings and come out the other side still responsible for significantly more debt than they thought they would be.

Coping With Those Difficulties

Fortunately, there are many practical ways to cope with the difficulties of bankruptcy. For example, with regard to the impact bankruptcy will have on your credit rating, one way to cope with that difficulty would be to structure your budget in such a way as to need less credit. You will still want to build some credit, but you could easily do so by using a secured card and paying it off in such a way as to minimize the amount of interest you end up paying. In terms of the debt which remains after bankruptcy, the fact that it has been restructured should make it easier to pay off.

On the Plus Side

Given all of these disadvantages, you may wonder why people declare bankruptcy at all. There are two answers to this. First, as long as it is done right, it can protect certain assets from seizure. Second, certain types of bankruptcy do result in the discharge of certain types of debt.

Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.

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