Due to the severe consequences associated with filing bankruptcy, it's wise to consider all the possible alternatives before filing a case. Bankruptcy helps if you're overwhelmed with debt. It can wipe away present debts and give you the opportunity to rebuild your credit with a clean slate. Unfortunately, the rebuilding process can take several years.
Damage to Credit Report
The repercussions of filing bankruptcy include a damaged credit report and score. Bankruptcy can reduce your personal score by 100 points or more. With a bankruptcy staying on your credit report for 10 years, any creditor reviewing your report will see your past mistakes and think twice before extending you credit.
Credit Rejections
Buying a home or financing an automobile after a bankruptcy is challenging. You'll have to deal with specific auto lenders who work with bad credit applicants.
If you have plans to purchase a home, a bankruptcy on your credit file will result in postponing the purchase for at least two years after your discharge and after you've regained some of your lost points.
Higher Interest Rates
Getting approved for new credit after a bankruptcy helps rebuild your credit history. Unfortunately, getting new credit may require talking with different creditors and lenders until you find one that's willing to extend financing. Once you've secured financing, you'll likely pay a higher interest rate on credit cards or loans due to your past bankruptcy. This increase in interest rate can significantly increase your monthly payments on new debt and limit your purchasing power.
Debt Elimination Plans
Developing a strategy to eliminate debt can help you avoid a bankruptcy. Yes, bankruptcy often provides a quick fix to excessive debts. The long-term consequences, however, are worth exploring other options for managing debt. Debt elimination is a gradual process, and simple maneuvers such as making higher payments each month and stopping credit card use can slowly put a dent in your balances. Taking a second job to create extra income also helps bring down balances fast, as does negotiating a lower interest rate on your existing debts. Be patient, it can take years to completely pay off your balances. Consider asking creditors to settle your debts for less than you owe on the account to help you avoid a bankruptcy.
Consolidation
Debt consolidation can help you manage your debt without filing bankruptcy. Several methods are useful for consolidating debts. Owning a home opens the door to home equity loans or home equity lines of credit, which lets you acquire a lower-interest rate, fixed loan using your home as collateral. Another option includes employing the help of a debt or credit counselor to negotiate better interest rates and combine your outstanding balances into one bill payment. Programs of this nature not only help eliminate debt sooner, but they teach you how to budget and manage debt better.
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