When your debt becomes too overwhelming to handle, declaring bankruptcy is a valid option that you can use to wipe your financial slate clean. Although this will help you with your immediate cash flow problems, that doesn’t mean that there are not some long-term financial consequences of doing so. One of the most well-known of which is that it lowers your ability to obtain a low-cost loan if you want to purchase a home or go back to school. However, there are several other long-term impacts that bankruptcy will have on your finances.
Your Ability to Secure a Job
Declaring bankruptcy can have an impact on your ability to obtain a job, as the effects of doing so spill into the labor market. One study done by the National Longitudinal Survey of Youth found that those who declared bankruptcy tend to work less and for lower salaries than those who have never declared bankruptcy. This could be because the Fair Credit Reporting Act allows employers to access their candidate’s and employees’ credit reports, which means that they can discriminate against those who have previously declared bankruptcy.
Impact on Cash Flow
You have two options for declaring bankruptcy–declaring a Chapter 13 or Chapter 7. Both of these will affect your cash flow differently. Chapter 7 bankruptcy will give you a “fresh start” by removing eligible debt and not require that you pay any of your creditors. Eligible debt includes medical bills, income tax, and credit card debt that are over three years old. Due to the fact this eliminates the need to make debt payments, your long-term cash flow will improve significantly after filing a Chapter 7 bankruptcy. On the other hand, a Chapter 13 bankruptcy mandates that you make payments to your creditors for between 3 to 5 years’ contingent on your income. Courts usually will require that all of your disposable income go towards making these payments, which means your cash flow will be tight for up to five years after declaring a Chapter 13 bankruptcy.
Impact of Losing Assets
Losing your assets, which sometimes comes with declaring bankruptcy, could have a long-term effect on your life. In some instances, your cars and houses can be seized to pay off some of your creditors losses, especially if you declare a Chapter 7 bankruptcy. The amount of property that you are allowed to keep when it comes to declaring bankruptcy largely depends on your particular financial situation at hand. The good news is that the federal bankruptcy code does protect your necessary personal property and retirement accounts.
Bankruptcy’s Impact on Long-Term Credit
By declaring bankruptcy, you are stating that you are unable to repay your debts under your creditor’s terms. Due to this, in the long-term, lenders will consider you a credit risk. This can make it problematic in the long run as it means that you will have a lot harder time qualifying for affordable interest rates. If you can be eligible for a credit card or loan after declaring bankruptcy in all likelihood, it will be for a much higher interest rate.
May Not Be Able to Afford the Things You Want
Due to the fact you will be subject to higher interest rates, bankruptcy often comes with far-reaching consequences concerning your personal finances. For instance, if you wish to purchase a new car then you may not be able to obtain an affordable rate to fund it, which means you may have to buy a less valuable or older car that you must pay for in full with cash. Additionally, if you are looking to purchase a new house, then it can be difficult to obtain a mortgage for several years after declaring bankruptcy.
Recovering from Bankruptcy
Despite these long-term effects, your bankruptcy will not follow you for the rest of your life, as time does heal all wounds, especially when it comes to your finances. Bankruptcies remain on your credit report for ten years, after which time they are removed and will no longer have an impact. The biggest contributor to your credit score is the amount of debt you have and your payment history, and so if you can take out a new credit card or loan and make timely payments, your credit score can improve.