The decision to file bankruptcy protection is a serious one, and the fallout is often major. A bankruptcy can wipe out all your debts. While this may seem like a practical solution to high debts, it's smart to file bankruptcy as a last resort due to the consequences that follow.
Loss of Possessions
Prior to deciding to eliminate your outstanding balances, a bankruptcy judge will likely review your debts and personal assets to see if there's a way for you to pay your balances, or at least a percentage of them. If you own several real estate properties, vehicles or other items of high value, a judge may dismiss your bankruptcy or work out a deal with your creditors wherein they receive payment after you sell a few of your belongings or personal property.
Impact on Credit Rating
Don't expect to file a bankruptcy and maintain a fair credit score. Because bankruptcies release your debt obligations, lenders and creditors will update your file and make mention of the bankruptcy. The bankruptcy itself will stay on your credit report for the next 10 years. This single entry can destroy your credit rating, and it can take years to reverse the damage.
Approval for Financing
The biggest downfall of a bankruptcy discharge is the inability to acquire new credit accounts. Some sub-prime lenders may finance you after a bankruptcy, but acquiring a prime loan with desirable rates will be tricky. Every lender who checks your credit report for the next 10 years will consider your bankruptcy when approving your application. Rebuilding credit and improving your credit score after a bankruptcy can take the hassle out of getting financing in the future. After a while, some lenders will look past your bankruptcy and focus on your recent credit history.
Considerations
Although you can include all your debts in a bankruptcy filing, it doesn't guarantee the discharge of all your debts. The courts will notify your creditors and lenders of the bankruptcy, and they have the option of coming to your hearing and contesting the discharge of monies owed. Also, you cannot include federal student loans in a bankruptcy discharge. You must continue paying debts not included in your bankruptcy discharge.
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