Weigh the Pros and Cons Before Declaring Bankruptcy

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If you’re debating the pros and cons of declaring a personal bankruptcy, you can at least take some solace in knowing that you’re far from alone. The number of U.S. residents who filed for personal bankruptcy rose by nearly a third in 2009, according to statistics released by the National Bankruptcy Research Center. The reason for this increase? It’s no surprise: Housing foreclosures have been at record levels for nearly two years now. The national unemployment rate had climbed past 10 percent, where it hovered as 2010 began. These two negatives have combined to send people into debt. For some, bankruptcy is the only way to get out of this bad financial situation. But before you declare bankruptcy, remember that this move should be an absolute last option; a bankruptcy will play havoc with your credit, and make it extremely difficult to get new credit cards or loans for the next 10 years of your life.

A Decade’s Worth Of Struggles

When you declare bankruptcy, it remains on your credit reports for 10 years. This is a serious issue. Lenders rely on your credit score when deciding whether you qualify for a mortgage, auto, business or personal loan. If your credit score is too low – under 620 – you’ll have to pay exorbitantly high interest rates on the money you borrow. Even worse, you might struggle to find a lender who will loan you money; ever since the economic crash began in 2007, lenders have been more skittish about working with borrowers with shaky credit histories. It takes 10 years for personal bankruptcy filings to fall off your record. This means that for an entire decade, you’ll struggle to take out new credit cards or acquire loans for a new house or car.

You Might Lose Your Assets

Declaring Chapter 7 bankruptcy does wipe out your debts. But this comes at a serious cost. You may lose your home, car and other personal possessions to help pay off your creditors. Depending on the severity of your debt situation, you might consider declaring Chapter 13 bankruptcy instead of Chapter 7. Chapter 13 is a less severe form of bankruptcy. In it, a court sets up a repayment plan that allows you to pay back your creditors on your schedule, with regular payments that you can afford. This type of bankruptcy still doesn’t look good on your credit report, but at least you’ll keep most of your important assets.

Getting Help

Once you’ve declared bankruptcy, it’s time to seek financial counseling so that you won’t fall into deep debt again. Find a credit counselor through the National Foundation for Credit Counseling. A counselor can help you change your spending habits so that bankruptcy will never be on your record again.

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