When you file bankruptcy, it means you’re going through a legal proceeding. In this legal proceeding, you are indicating that you aren’t able to repay your debts or outstanding obligations. A bankruptcy process begins when you, as a debtor, file a petition. Your assets are measured, and they’re evaluated. Your assets might be used to pay part of your debt that’s outstanding.
Federal courts handle bankruptcies, and the idea is that you’re given a chance to start fresh through forgiven debts that you can’t pay. Creditors are given a chance to obtain at least some repayment based on assets available for liquidation.
There are different types of bankruptcy, including chapter 7. A chapter 7 bankruptcy is geared toward individuals with few assets, so they can eliminate their unsecured debts.
While bankruptcies do have some benefits and, in some cases, can be the only option available to a person, they also have consequences, seven of which are highlighted below.
1. They Could Show Up When Someone Searches For You
If someone is looking up your name online for any reason or doing a formal background check, they might see that you went through bankruptcy.
For this to show up, usually, someone would have to run a Federal Bankruptcy Search, which checks the federal bankruptcy courts for filings. The results will show any Chapter 7, 11, and 13 bankruptcies going back a maximum of 10 years.
The search results might also include a case or file number, the date filed, the discharge date, and names listed as petitioners.
2. Loss of Property
One of the most significant consequences of bankruptcy is the loss of property. Both of the main types of bankruptcy proceedings people go through can require them to give up their possessions to repay creditors.
In some circumstances, bankruptcy can mean losing real estate, jewelry, vehicles, and more.
Your bankruptcy can also affect other people financially, such as someone who co-signed a loan for you. If you had a parent who co-signed a car loan, as an example, they could be held responsible for at least a portion of the debt if you file for bankruptcy.
3. Damage to Your Credit
When you file for bankruptcy, it damages your credit. These are negative information on your credit report, affecting how a future lender might view you. If there’s a bankruptcy on your credit file, it can lead creditors to avoid extending credit to you. They might offer you less favorable terms, such as higher interest rates, if they agree to give you credit at all.
Depending on the type of bankruptcy you file for, the negative information can appear on your credit report for up to 10 years. Discharged accounts have the status updated to show they’ve been discharged, and the information will appear on your credit report as well.
4. Inability to Get Loans and Credit Cards
As mentioned, if you have bankruptcy information on a credit report, the ability to get additional credit after it’s discharged is going to be very difficult and potentially impossible. You’ll have to wait until the information drops off your credit report in most cases.
If you go through bankruptcy, it’s important to start rebuilding your credit immediately and paying your bills on time.
You also want to make sure you’re not falling back into the same habits leading the problems with debt in the first place.
If you can’t get credit, of course, it’s also going to be hard to get a mortgage. Lenders might flat-out turn down your mortgage application. If they do accept it, they might do so when offering you much higher fees and interest rates.
You might have to put up a higher down payment or take on higher closing costs.
6. Psychological Impact
We often think about the financial fallout of bankruptcy but focus less so on the psychological effects, which are very real.
When you go through a bankruptcy, there’s a sense of stigma that you might feel you carry around.
Some people may not be affected by stigma, but for others, they can feel like a failure. You might start to feel depressed or hopeless and like you won’t ever be able to change your finances.
You could also worry that your friends and family will feel similarly about you.
You do have to think about relationships and your mental health before you file bankruptcy. If you feel like you’re experiencing major psychological impacts, you should talk to a mental health professional.
7. Your Employer May Learn About It
If you file for bankruptcy, your employer may find out, although it’s fairly rare.
One way they could find out is if you have a wage garnishment. An employer could find out if you file for Chapter 13 payments too. In some bankruptcy courts, a judge will require an employer to deduct Chapter 13 bankruptcy payments from your wages. They’d then have to send the money to the Chapter 13 trustee who’s responsible for your case. Under some Chapter 13 plans, your employer can become like a collection agency.
If you owe your employer money, then they may find out about bankruptcy. You have to list all debts when filling out bankruptcy paperwork, so if you’re paying back something like a payroll overpayment, you must include it. Then, your employer may get notice of your case.
On the other hand, no state, federal or local government agency can consider bankruptcy when they decide whether to hire you. A private employer can, though. Some people do find that having a past bankruptcy affects them. It can primarily affect you if you’re applying for a job where you’d deal with money. Your employer could find out if they did a credit check, and they could see it on your credit report. An employer does need your permission to run a credit check, but employers can also refuse to hire you if you aren’t willing to consent.