Many Americans, finding themselves laid off or otherwise out of work, are considering filing personal bankruptcy in order to stop creditors from calling and debts from piling up. The biggest question many people have before taking this tough step is, what are the negative effects of personal bankruptcy? And are the results different whether you file Chapter 13 (which is a reorganization of your debt) or a Chapter 7?
First, it's important to know that in not all cases do you need to file for bankruptcy. With changes in the bankruptcy law in the recent past, it is actually more difficult to file to just get rid of your debt altogether. Now, if you are working, a court will try to find a way for you to get on a repayment plan for at least some of your debt. So, if you have no assets, like a house, cash accounts or cars or other property that can be taken away, a creditor who gets a judgment against you really has no way to collect anyway.
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You should also be clear that there are negative effects of Chapter 13 bankruptcy, as well as for a Chapter 7 bankruptcy, so you do not do yourself a favor to file one instead of the other. The primary negative effect is that you are obviously unable to pay your bills, and you may wind up not having to pay some creditors when you file bankruptcy, so other creditors will look at that as a serious credit risk in the future.
When you file, your credit score will also take a hit. Having a bankruptcy is not the same as just a delinquent debt. Old debts can be repaid bit by bit, but a bankruptcy carries more negative weight on your credit report. If you think you can repay a debt within five years, it's worth trying to work something out. If the creditor refuses however, they will certainly realize that bankruptcy is your only remaining option.
One rule of thumb that is often used when trying to decide whether to file personal bankruptcy is that if your debt is more than twice your annual income, then you will likely be unable to repay that debt if a reasonably number of years. At this point, it might be worth talking with a bankruptcy attorney to see what your options are.
You can also still lose your house in bankruptcy. The law will depend on your state of residence, but in many states, bankruptcy only delays the mortgage lender from selling your home. Eventually, they will get the court to agree to a sale if you have no other way to pay the mortgage, and the house is the only asset you have.
Today, more programs are becoming available, and more lenders are working with creditors, in order to get some payment rather than none. Try talking to your creditors first. However if you are unemployed and your prospects look dim, the negative effects of personal bankruptcy may be outweighed by your opportunity to help get a fresh start and rebuild your credit.
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