How Filing Bankruptcy Affects Your Life


It can happen to almost anyone at different periods of vulnerability in their lives wherein the only choice they find left available to them is to file bankruptcy. There are pros and cons to filing and not filing and in the end, the decision is solely yours. Make sure to make a list of the upside and downside before signing on the dotted line to ensure that you make the best decision based on your state of finances.

What is Bankruptcy?

There are two types of bankruptcy; Chapter 7, a total liquidation of your debt and Chapter 13, wherein you make arrangements at a reduced percentage of the debt to repay monthly for an agreed amount of time. Chapter 7, the most common, is generally something that the average person choices. In most cases, they are so far in debt, with little or no assets that most creditors accept the loss. Chapter 13, is usually something that a person who has a substantial amount of money coming in but is unable to dig out from under immediately. In both cases, it remains on your credit report as a strike against you for up to 10 years.

Applying for a Loan

Once the court discharges your bankruptcy, you can breathe a sigh of relief and enjoy a fresh start. Unfortunately, your happy dance of debt-freedom can end rather quickly. The chances are now greatly reduced for getting a loan and if you do get one, you can expect to pay much higher interest rates. A traditional bank pulls a credit report and uses it primarily as the basis for your loan approval. While you now have no debt, a plus, you also have no credit. The good news is that not all lenders view a bankruptcy negatively. After all, you can’t file again for at least another 7 years. There are online institutions that can provide a short-term loan for a few thousand giving you an alternative to payday loans. While they will have a higher interest rate than the going rate, they are within reason.

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Borrow from Yourself

If you don’t want to start racking up debt again, you can opt to borrow from yourself. If you have a 401K through your company and you are fully vested, you can borrow up to 50 percent of the available balance. While you will have a loan to repay and it will take away from your net weekly or bi-weekly check, you will be paying yourself back with interest.

Utilize Your Talents

Most people have a talent away from the workplace. Maybe you knit or do crafts, or you enjoy creating shelves or like to tinker with cars. Whatever your talent, if all else fails you can use it to earn additional monies each month to keep yourself afloat without the need for borrowing money.

Life After Bankruptcy

There are pros and cons to filing bankruptcy. On the plus side, you reduced your debt significantly and now have money to pay for daily expenses. On the downside, your credit takes a big hit and the recovery period is lengthy. While it will appear on your credit report for up to 10 years, you can reduce the effects and shorten the length of time that it hinders your ability to enjoy a line of credit. Start by getting a secured credit card and paying it off faithfully each month. After a year or so, you should be able to apply for an unsecured card based on your reliable payments. This will, in turn, open the door to a car loan and eventually, a home mortgage too.

If you’ve made the decision to file bankruptcy, life as you know it doesn’t have to end. While you will have a period of restoring your good name, you can enjoy most of the things you did before. With a truly fresh start ahead of you, you can use this as a learning experience and avoid getting in over your head with too much debt moving forward.

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Mark Holland

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