The side effects of a bankruptcy include sighs of relief, stress reduction, increased disposable income, a new found respect for budgeting, a long-term financial plan that includes retirement, a preservation of savings, improved sense of self, improved sex life, financial control, improved credit scores, just to name a few. Stop right there. I know you’re probably saying, “how does my credit score improve?” It seems illogical that a credit score is likely to increase due to a bankruptcy filing, but let me explain.
Credit scores are based upon so many factors in the FICO scoring system that basically include the number of trade lines (how many credit cards, etc. that you have), the balance owed as compared to the credit limit, collections and late payments, charged off accounts, judgments, etc. What happens in bankruptcy is that we eliminate the debt. The effect on the credit report is an improvement in the overall score because you’re no longer carrying high balances on credit lines. Even though the act of filing for bankruptcy causes a credit score decrease, the improvement in the score comes from eliminating the debt. Many clients begin receiving offers of credit immediately after their bankruptcy case ends because creditors know two things: (1) that you have a taste for credit; and (2) you cannot file for bankruptcy for another eight (8) years. It is possible to rebuild and obtain credit after bankruptcy.
Where Bankruptcy May Not Help
Bankruptcy does not necessarily erase all financial responsibilities. If you have fallen behind on these debts, a court approved debt repayment plan under Chapter 13 of the Code can help you get caught up on your bills. It typically does not discharge the following types of debts and obligations:
- Child Support
- Debts that arise after bankruptcy is filed
- Some debts incurred in the six months prior to filing bankruptcy
- Loans obtained fraudulently
- Debts from personal injury while driving intoxicated
- Debts from willful and malicious injuries to person or property
- Some student loans
- Some taxes
In conclusion, bankruptcy is a powerful tool to help you regain financial control either through a court approved repayment plan, or complete elimination of debts without repayment. Bankruptcy can save time and resources from being taken to pay bills. For example, you can keep your home, cars, and retirement accounts and still get rid of debt. You can remove liens against your home, repay all or a portion of your debts without interest. The side effects of bankruptcy may far outweigh the long lasting effects of doing nothing or taking more than five (5) years to get out of debt.