Bankruptcy isn’t right for every debt problem. While bankruptcy is a fantastic solution for most people facing serious debt, other options are available that should be used depending on the circumstances. So what are the disadvantages of bankruptcy? There are three disadvantages as to why bankruptcy may not be a viable option.
Hit to Your Credit Score
First, a bankruptcy will remain on your credit record for seven to ten years after the discharge and can affect your future finances. However, most people in a bankruptcy situation are already have poor credit – making credit a typical non-factor. A bankruptcy is often looked upon by debtors as a step in the right direction. Credit card companies will typically offer credit almost immediately after bankruptcy.
Unfortunately, the interest rates can be incredibly high – to upwards of 20% or more. Other issues might crop up if you start a business within a few years of bankruptcy and want to obtain business loans through your own name. Again, those with crushing debt probably won’t be looking at obtaining business loans anytime in the near future anyway.
Obtaining Future Loans
The second disadvantage of bankruptcy is you may be impeded from being able to obtain a home or car loan – or a refinance of a home kept during a bankruptcy. The hit is not dramatic considering the typical benefit.
Most people become eligible for a mortgage or refinance two years after a Chapter 7, or 1 year after a Chapter 13 payment plan ends. If your situation allows you to carry a car or a single home loan through a bankruptcy, your credit will rise much faster.
Obtaining quality used cars even immediately after filing is actually quite easy. There are some upstanding used car dealers who cater to people just out of bankruptcy. You have to look around for a good one though, since some will sell you lemons. A bankruptcy attorney may help you find a dealer who can get you into a quality car for a fair monthly price. I’ve personally helped people get into cars the weekend after their bankruptcy was filed… so its very possible in many situations if you do have a full time job.
Too Many Non-Dischargeable Debts
Finally, not all debts can be discharged. Student loans typically cannot be erased. Child support, alimony, divorce settlements and some income taxes cannot be discharged. If the majority of your debt is made up of non-dischargeable debt, it may be better to use an alternate means of debt reduction.
The biggest reason for choosing a debt solution other than bankruptcy is the size or nature of the debt. For those facing things like credit card debts of around $10,000 or less – credit consolidation is usually a financially better option. After $10,000, the net cost to benefit of a bankruptcy increases dramatically as debt goes up.
If most of the debtor’s debts are not dischargeable in bankruptcy, then a bankruptcy may not be beneficial at all. Debt negotiation or short sales may be better for student loan debts, mortgages, or other secured debts.
For those in a lot of debt ($10,000 or more), then bankruptcy is an amazing and under-utilized solution. Bankruptcy is not effective in every situation, so make sure you ask around and find out as much information as you can for your own specific situation. Both bankruptcy attorneys, credit counselors and credit consolidators will all try to sell themselves on every debt – so ask around to find the upstanding and honest ones.