How Does Personal Bankruptcy Affect You?
Bankruptcy is a scary word. There is such a stigma attached to it that many people are afraid even to consider filing for personal bankruptcy, even when it is the best alternative. To de-mystify bankruptcy, it helps to understand how bankruptcy affects you.
What Debt Does Bankruptcy Remove?
Filing for bankruptcy removes a significant portion of your debt, but not all of it. Take some time to figure out what is driving your debt. If you have a significant amount that can't be discharged, then filing for bankruptcy may be a poor decision. Examples of debts that are discharged by bankruptcy include:
- Credit card debt for unsecured credit cards – this means that the credit extended to you is not secured by any type of property or deposit
- Debts owed to collection agencies
- Medical bills
- Personal loans from friends and family
- Auto accident claims, except if you were driving while intoxicated
- Older tax penalties and unpaid taxes (under special circumstances)
- Lease money owed, including rent that is past due
What Debt Does Bankruptcy Fail to Remove?
There are some debts that cannot be removed or may prove very hard to discharge. Debts that are generally not covered include:
- Alimony payments
- Back child support
- Income tax debt
- Student loans (unless you can show that paying back the loan causes "significant hardship", something that is very hard to do)
- Personal injury settlements
- Criminal and civil fines or penalties
How Does Bankruptcy Affect Your Credit?
On most credit applications, there is a check box that asks if you have ever filed for bankruptcy. People assume that, if they have, they will be denied credit in the future; however, this is not the case. The type of credit can differ, at least in the short term, after a bankruptcy.
There are two types of credit cards, secured and un-secured. Most people have un-secured credit cards, which means that there is no property or money being used as collateral for the card. With a secured credit card, a financial deposit is required with the bank issuing the credit card. This financial deposit is collateral against any debt incurred on the card.
If you filed for bankruptcy, you can apply for a secured credit card within months of coming out of bankruptcy. In fact, it is recommended that anyone who is exiting bankruptcy get a secured credit card and make regular payments to start rebuilding credit ratings. Over time, you can rebuild your credit score and eventually apply for and receive an un-secured credit card again (if you wish to have one).
The bottom line is that bankruptcy is still a painful process, but there are benefits from going through the process if you have credit that can be removed by a bankruptcy filing. Tax attorneys who specialize in bankruptcy can further clarify the process and help you to make the right choices as you file for bankruptcy, work through your re-payment plans, and come out of bankruptcy.
Contact professionals like Wiesner & Frackowiak, LC to learn more.