Consumers shouldn't use bankruptcies as a way to fix debt problems. Yes, a bankruptcy can wipe out your outstanding credit card and loan balances. However, the consequences are severe and long-lasting. Before filing a bankruptcy with your court system, consider the effects on your credit and personal finances.
Credit Score Drop
The full effects of a bankruptcy are unknown until the information shows on your credit report. A drop in credit score is expected, and the actual damage of filing a bankruptcy varies for each person. According to the Consumer Credit Counseling Services, a bankruptcy can reduce credit scores by 100 points or more. A bankruptcy filing is likely to affect someone with good credit more than someone who already has bad credit.
Decade Credit Stain
Bankruptcies remain on credit reports for the duration of 10 years. Having this information on your personal file may scare off some lenders and make opportunities for financing in the future scare to non-existent.
Interest Rates
Higher interest rates are expected after filing bankruptcy due to a drop in credit scores. Creditors and lenders charge higher interest rates after bankruptcy because you're seen as a high-risk applicant who is more likely to default on bill payments than someone with a good credit score. The higher your interest rate, the higher your payments on a loan or credit card. For example, a five-year $15,000 car loan with a 4 percent interest rate has a monthly payment of $276.25. Increase the interest rate on the same loan to 10 percent and monthly payments jump to $318.71.
Mortgage Loans
After filing bankruptcy, you'll likely need to postpone any plans to purchase a home for at least two years. According to the Home Loan Learning Center, mortgage lenders typically require a minimum credit score of 680; therefore, they will not consider your application shortly following a bankruptcy. You'll need the time to rebuild your credit score and prove that you can manage your debt and finances. Federal Housing Administration-insured home loans are an option 24 months after a bankruptcy, says Bank of America. Mortgage brokers and lenders can provide specifics on eligibility.
Employment
Filing bankruptcy doesn't only affect loan options, it can also affect employment opportunities available to you. Certain jobs in industries such as the government and banking do require a good payment history (no missed or late payments) and no recent derogatory information (bankruptcies, foreclosures, repossessions and collection accounts). A bankruptcy can indicate poor debt and money management skills and disqualify you for a position.
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