4 Ways How Bankruptcy Affects a Person’s Financial Life
Managing finances is an important aspect of one’s life. It requires proper planning, budgeting, and saving to achieve financial stability. However, life is unpredictable, and no one can be fully prepared for unexpected expenses such as medical bills, job loss, or a global pandemic. In such cases, individuals may struggle to pay off their debts and consider filing for bankruptcy.
Bankruptcy is a legal process in which individuals or businesses who cannot pay off their debts can seek relief from some or all of their debt. There are two types of bankruptcy: Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, individuals must sell their non-exempt assets to pay off their creditors; the remaining debts are discharged, and the individual can start fresh. Chapter 13 bankruptcy involves a repayment plan that allows the individual to repay their debts over a period of three to five years.
However, bankruptcy goes deeper than just those definitions as it has significant financial implications for an individual, including:
#1 – Your Credit Score Will Lower
Your credit score measures your creditworthiness, and bankruptcy can significantly lower it. A person’s credit score is based on their credit history, payment history, and overall debt-to-income ratio. When someone files for bankruptcy, it negatively impacts their credit and payment history, and it will take a long time until it gets removed from their credit report. As a result, it can be difficult for someone who has filed for bankruptcy to get approved for loans, credit cards, or even rent an apartment.
#2 – Your Credit Limit Will Not Increase
Since bankruptcy affects a person’s creditworthiness, creditors are less likely to extend credit to someone who has filed for bankruptcy. Even if a person is approved for credit, the credit limit is likely lower than before they filed for bankruptcy. This can make rebuilding one’s credit score challenging since the available credit is limited, and high credit utilization negatively impacts the credit score.
#3 – You Will Get High Interest Rates
To clarify, anyone who has filed for bankruptcy can still get a loan. However, the catch is that the interest rates will be much higher than before. Lenders consider bankruptcy a red flag, compensating for the risk by charging higher interest rates. This means that even if a person qualifies for a loan, they will pay more in the long run due to the high interest rates.
#4 – You Will Get Less than Favorable Terms and Conditions
In addition to high interest rates, those who have filed for bankruptcy may also receive less favorable terms and conditions on their loans. This could include shorter repayment periods, higher fees, and more stringent requirements for approval. Lenders may also require collateral or a co-signer to reduce their risk, burdening the borrower.
#5 – Bankruptcy Stays on Your Record for 7 to 10 Years
A record of bankruptcy is hard to erase as it stays on your credit report for 7 to 10 years, depending on the type of bankruptcy filed. This can make it difficult to obtain credit or loans during this time, as lenders will see you as a higher risk. Beyond that, lenders will also consider your bankruptcy history when evaluating your creditworthiness, even after it has been removed from your credit report.
Getting Your Finances Back on Track
While bankruptcy can significantly impact an individual’s financial life, there’s light at the end of the tunnel. There are several steps individuals can take to get their finances back on track. For one, creating a budget to focus on debt payments and savings can help prioritize financial goals and keep spending in check. When this happens, the credit score can gradually improve, making it easier to obtain credit and loans in the future.
Additionally, individuals can work on rebuilding their credit by obtaining a secured credit card or becoming authorized users on someone else’s credit card. Making timely payments and keeping credit utilization low can help improve credit scores.
To ensure you stick to your goals, consult a financial advisor or credit counselor who can provide guidance and support in managing your finances. They can help create a personalized debt repayment plan and offer saving and investing strategies.
Work with an Experienced Bankruptcy Attorney
Bankruptcy has significant consequences and should only be considered as a last resort. If you find yourself in such a situation, you must do everything you can to ensure that you are making informed decisions and taking the necessary steps to improve your financial situation. This way, you can avoid falling into the same financial struggles in the future.
Angela R. Owens can help you if you need a bankruptcy attorney in Plano! We understand the legal and financial implications of bankruptcy, so we will work with you to ensure the process will have minimal impact on your life. Schedule a consultation today!