The Disadvantages of Declaring Bankruptcy

Bankruptcy is the most negative credit event possible, with long-lasting ramifications. Declaring bankruptcy has so many negatives that federal bankruptcy law usually requires people considering the move to schedule pre-bankruptcy counseling with a government-approved credit counselor. The counselor discusses how punitive bankruptcy is for some people, along with its positives. Most people who file for bankruptcy are suffering from excessive debt and feel they have exhausted all other possible solutions for their problems.

Credit

Negative effects on credit are arguably the biggest disadvantage to declaring bankruptcy. Bankruptcy information remains on a debtor's credit reports for 10 years. It is possible to obtain credit immediately after bankruptcy, according to MSN Money. However, people emerging from bankruptcy may initially qualify only for secured credit cards requiring deposits into bank savings accounts for collateral. They may also qualify for gas station or department store credit cards with credit limits as low as $100. In many cases the credit limits are only a fraction of the limits the debtors enjoyed before bankruptcy. After two or three years, people who were in bankruptcy may qualify for larger credit limits

Housing

Buying a new home is possible, too. However, mortgage lenders may require two years of on-time payments on all bills after the bankruptcy -- including rent payments. Also the mortgage company may require a significant down payment of 20 percent. The bankruptcy may disqualify the debtor for consideration for the most favorable interest rates or special programs offering lower down payments.

Privacy

Bankruptcy information is public record. People filing for bankruptcy risk having their financial information seen by anyone requesting it. A friend, neighbor or coworker could access electronic databases to read the complete bankruptcy filing. Bankruptcy filings include all the debtor's debts and assets at the time of the filling along with specific dollar amounts and other details.

Employment

Privacy Rights Clearinghouse, a nonprofit consumer information company, reports that bankruptcy can also hinder a job search. Some employers hiring for certain positions may disqualify candidates who have filed for bankruptcy. Some employers require credit checks as part of pre-employment background checks. Others ask on job applications if the candidate has ever declared bankruptcy.

Stress

Bankruptcy offers protection from creditors, but it also causes stress and worry. Some people file for Chapter 13 bankruptcy, which requires a payment plan of three to five years. During that time the federal bankruptcy court closely manages the debtor's household budget. A trustee assigned to the case places the debtor on a strict spending plan designed to free up as much money as possible to pay creditors. Many participants in bankruptcy find the process so restrictive that they withdraw from the bankruptcy, allowing their problems with creditors and debt collectors to resume.