Bankruptcy has the power to ruin your financial life. When you file for bankruptcy, it means you have reached a terrible state in your finances and you are unable to pay off your debts. This is actually considered to be the last option for most people. Given the gravity of its effects on your finances, experts really advise against using this option to get rid of your debts.
Before you judge people for filing for bankruptcy, you have to know that some of them were not reckless with their money. Not all of them are filing because they had too much credit card debt. Approximately 530,000 families file for bankruptcy because of medical reasons. That’s 66.5% of all bankruptcies – which makes it the number 1 reason to file. The other reasons include mortgages, helping loved ones, overspending, divorce, student loans, etc.
Of course, bankruptcy will not lighten its negative effects on your financial life just because you got sick. This is why people are still encouraged to avoid it as much as possible.
But what are these effects that you should be cautious of?
How bankruptcy affects your financial life
There are three ways that bankruptcy can really affect your personal finances.
Damaged credit report
The most prominent effect of bankruptcy is evident in your credit report. It will be reflected there that you have filed for bankruptcy. That can really destroy your credit score. Your score can go down by 200 points or more. That means a 700 credit score can go down to 500 points or less. That will have an effect on your future financial transactions – at least, this is true for the immediate ones.
Don’t worry because your credit report will go up over time. But you have to make sure that you pay your dues in time and you will not borrow more than what you can afford. This will take a long time so you may have to hold off any plans to borrow money.
Lower financial options
This is the effect of having a lower credit score. It can restrict the financial options that you may have. Even if you suddenly get a job to rebuild your financial life after bankruptcy, it wouldn’t matter. This record will keep you from enjoying the usual financial options that you had before bankruptcy. For instance, buying a home will have to be postponed for quite some time. Even if you have the down payment, it’s not a good idea to immediately buy a property. It doesn’t matter if you have completed the 20% down payment on hand. When you borrow a loan for 80% of the selling price, you might not get the best terms for that. You‘ll either have additional fees to pay or a higher interest rate.
The same is true for other loans that you may want to apply for. If you want to start your own business, it would be harder for you to get the capital you need to get started. It’s also not the right time to get a new car. At least, if you’ll borrow an auto loan to get one, you’ll probably be given a higher interest rate also.
Bad public record for years
It’s bad enough that bankruptcy will limit the financial resources that you can enjoy. What’s worse is you have to live with that for a long time. The stain of bankruptcy will show in your credit report for at least 7 years. In some cases, it will stay there for 10 years.
This will also be considered a public record. That means anyone can see it. If you apply for a job, your potential employer might find out about the bankruptcy you filed. While this will not discriminate you from getting that job (at least, it shouldn’t), it’s still not something you want them to know. After all, you’re trying to impress them. You don’t want them to know about this event that destroyed your financial life. It will be embarassing for them to know this information – even if its a part of your past.
Signs your financial life is going to end up in bankruptcy
The three devastating effects of bankruptcy should convince you to try and avoid it as much as possible. Of course, there are instances when things go beyond your control. You’ve been very careful about your financial choices but life happens and you end up at a huge disadvantage. Just like what’s happening recently. The rising unemployment caused by the combination of the coronavirus pandemic and the recession might trigger a huge wave of bankruptcy filings. Although the current data shows that this has not happened yet, history reveals that it usually follows. So you have to be careful with how you spend your money right now.
In most cases, you’ll see signs that you are on your way to bankruptcy.
You can no longer repay your debts
The first is you can no longer pay off your debts. Or at least, if you can’t do it without sacrificing a basic necessity. Obviously, you won’t prioritize your debts over food and groceries. Nor will you pay it over your utility bills. Maybe the debt that you will prioritize is your home loan. But other than that, you might not put any other debt as your priority.
Not that you will completely ignore the others. But there are options that will allow you to postpone payments without really harming your financial life further. This is possible for student loans, credit cards, and personal loans. But you have to go through the right process to activate it. This will help you avoid bankruptcy.
You don’t have enough income to make ends meet
Another sign that you are headed for bankruptcy is when you can’t even meet your basic needs. Even if you stop paying for your debts, you still don’t have enough money to pay for everything you need to survive. If this is your case, then you are a good candidate for bankruptcy. If you file for one, there’s a high chance that you will be approved.
How can you turn this around? You have to do something to increase your income. Most of the time, you reach this point because of too much debt and a lack of income will really make bankruptcy a reality. Although it’s hard, there are a lot of opportunities to earn extra cash each month. You can go online to offer freelancing services. You can capitalize on a hobby or skill to sell. Find an idea that you can work with and concentrate on that.
Your creditors and lenders keep calling you
The last sign that your financial life is leading towards bankruptcy is when creditors and lenders are already calling you. Or maybe they already passed on your account to a debt collector. When that happens, you’ve already stopped paying your dues for quite some time.
How will you remedy this? You can talk to your debt collectors – or if it’s still possible, your creditors and lenders. You can try to negotiate a reduction in your debts. You’ll ask them to allow you to pay a portion of what you owe and have the rest forgiven. This is possible as long as you can prove that you are already on the brink of bankruptcy. Negotiating is a better option to keep the effects of debt from destroying your financial life further.