Hard Truths about Bankruptcy
In the movie Jerry Maguire, Jerry’s crisis of conscience leads him to write a company memo/mission statement for his sports agency. The title of the memo is “Things We Think And Do Not Say.”
It promptly gets him fired.
Every profession spins its services and has its “dirty little secrets.” Bankruptcy is no different. The benefits of filing are well-known. They include:
- Stopping lawsuits, creditor harassment, and other debt collection activities
- Protecting real and personal property
- Eliminating or reducing unaffordable debts
But filing bankruptcy cannot guarantee happiness, or future prosperity, and, sometimes, debtors don’t even receive the fresh start that attorneys promise in the yellow pages. There are positive and negative aspects to filing bankruptcy, and there are risks. Knowing the negative consequences of filing bankruptcy can help you make an informed choice. Let’s look at a few hard truths about bankruptcy:
Bankruptcy wrecks your credit
Fair, Isaac and Company (FICO) reports that an individual with a 680 credit score will lose between 130 and 150 points by filing bankruptcy. A bankruptcy filing is a public record that can stay on a credit report for up to ten years from the date the case is filed. Each debt discharged during a bankruptcy case will be reported as “included in bankruptcy” and will remain on a credit report for up to seven years.
[Positive aspect: some credit scores actually increase after filing bankruptcy. Bankruptcy stops the continuation of negative reporting and helps you recover quickly from burdensome debt.]
Bankruptcy does not discharge all debts.
Filing bankruptcy does not mean that you can “walk away” from all of your financial obligations. Some debts are excluded from the bankruptcy discharge as a matter of law. Secured debts, such as a car or house payment, must (generally) be paid for or the property must be surrendered. Certain debts are deemed non-dischargeable, such as child support payments and some taxes. Other debts are not dischargeable because of bad acts, such as charging up credit cards on a spending spree on the eve of bankruptcy.
[Positive aspect: most debts are dischargeable and will never again trouble you.]
Bankruptcy can affect your employment
Bankruptcy can cause the loss of a security clearance, which can mean loss of a position and ultimately termination of employment. There is no prohibition for private employers who may freely discriminate against a person with a bankruptcy, which sometimes happens during the hiring phase.
[Positive aspect: federal law prohibits employers from firing employees for filing bankruptcy. Bankruptcy stops collection calls and clears up debts that may negatively impact employment.]
Bankruptcy Affects Future Housing
Federally guaranteed home loans are generally not attainable for several years after a bankruptcy. Mortgage brokers call this post-bankruptcy period “seasoning,” and the average waiting period is two to four years. Additionally, there is no legal prohibition against a landlord discriminating against an individual with a bankruptcy on his or her credit report. Some bankruptcy debtors are either rejected during the apartment application process or forced to pay a larger security deposit to guarantee future rental payments.
[Positive aspect: many individuals are able to qualify for home loans two years after filing bankruptcy.]