3 big bankruptcy risks to know before filing this August

CBS News

6 days ago

Filing for bankruptcy is often viewed as a last resort option — a way to hit the reset button when your debts have spiraled out of control. And, this summer, many Americans are reaching that crossroads. Credit card balances are climbing, interest rates remain high and the lingering effects of inflation are stretching household budgets thin. As a result, there's been an uptick in personal bankruptcy inquiries and filings as more people turn to bankruptcy for a way out of their serious debt issues.
But while filing for bankruptcy can erase many types of debt and offer legal protections from your creditors, it's not a free pass. The process is complex, public, and, in many cases, expensive. Plus, the financial repercussions that come with taking this route are long-lasting and can ripple far into the future. And, depending on the type of bankruptcy you file, you may also still be responsible for repaying some of your debts.
So, while bankruptcy can provide vital relief from overwhelming debt, it's essential to understand the risks that come with it before making any moves this August.
Find out what strategies you can use to reduce your debt today.
Before you rush to a bankruptcy attorney's office, make sure you weigh the following risks to ensure that this type of relief is right for you:
Bankruptcy can provide relief from your expensive debts, but it leaves a lasting scar on your credit report in return. A Chapter 7 bankruptcy, which eliminates eligible unsecured debts like credit cards, stays on your credit report for 10 years. A Chapter 13 bankruptcy, which involves a repayment plan, sticks around for seven.
During that time, your ability to borrow may be limited or come with extremely high interest rates compared to those offered to prime borrowers. As a result, getting approved for a mortgage, car loan or even a credit card could be difficult. And even if you do get approved, your options may be limited to subprime lenders that charge steep fees.
That's not to say you can't rebuild your credit after bankruptcy — you can. But it takes time, patience and discipline. So if you're thinking about filing this August, be prepared for navigating a long road back to good credit.
Chat with a debt relief expert about the help that's available to you now.
Bankruptcy doesn't always mean you're getting a clean slate, not without making sacrifices, anyway. Depending on the type of bankruptcy and the laws in your state, you could be required to give up certain possessions, like a second car, investment properties or even part of your home equity.
With Chapter 7 bankruptcy, for example, a court-appointed trustee may sell off your non-exempt assets to repay creditors. And while many states allow you to keep essentials like your primary home, personal items and tools of your trade, the exemptions vary. File in the wrong state or get the timing wrong and you could lose more than you expect.
On the other hand, filing for Chapter 13 bankruptcy may allow you to keep more of your property, but you'll need to stick to a three- to five-year repayment plan, which can be strict and burdensome. If you miss payments, you risk having your bankruptcy case dismissed entirely.
Bankruptcy isn't just a financial event. It can also have wide-reaching personal and professional consequences. Employers, landlords and insurance companies may consider your credit history when making decisions. And, while they may not always deny you solely for filing bankruptcy, it could work against you in certain situations, like a competitive rental market.
Some professional licenses and security clearances may also be affected, depending on your industry and employer. And there's an emotional weight to filing for bankruptcy, too, as the process can be invasive, requiring you to disclose all of your financial details.
Before filing for bankruptcy, it's usually worth exploring the alternative options that could help you get out of debt without the long-term consequences. These include:
Filing for bankruptcy can offer relief from overwhelming debt, but it comes with serious tradeoffs. From damaged credit to potential asset loss and long-term limitations, the consequences can stretch far beyond the short term. So, before you take that step, explore every alternative. The right solution may not be the fastest, but it could save you time, money and stress in the long run.