Bankruptcy is a legal process that helps relieve you from an obligation to pay some of your debts. Also, the bankruptcy status allows you to reorganize your financial life and pay the debts you cannot eliminate. Although bankruptcy is an easy way out of debt, the decision to declare bankruptcy should not be taken lightly. You should bear numerous consequences if you decide to go this route.

Bankruptcy is not always the right option for everyone who is in debt. Therefore, understanding its downside will help you make the right decision. If your financial life is on edge with creditors constantly calling you to claim their debt, you could consider bankruptcy. However, before you start the process of filing, it is crucial to seek the guidance of a knowledgeable bankruptcy attorney.

What are the Consequences of Bankruptcy?

Filing for bankruptcy helps individuals or businesses that are unable to pay their debts a way to solve the financial crisis. Bankruptcy can help you rebuild your financial life. Although bankruptcy has many benefits, it has repercussions that could negatively impact your lifestyle and financial status. As a result, it is always important to consider both the advantages and the consequences before rushing into bankruptcy. The following are some consequences of bankruptcy:

Loss of Property

Losing your property and assets is a common outcome when filing for bankruptcy. Chapter 7 and 13 bankruptcy work very differently when listing your property. When you file for bankruptcy under chapter 13, your property will enter the bankruptcy estate and be held by the bankruptcy trustee. Unless the property is exempt, the trustee will sell it and give you the money to pay your secured creditors.

The most damning consequence of filing for bankruptcy is losing your home. Whether or not you keep your home after filing for Chapter 7 Bankruptcy will depend on the following factors:

  • Whether or not your mortgage is current. Most people file for bankruptcy because they are incapable of paying their debts. Therefore, it is unlikely that you are current with your mortgage when you declare bankruptcy.
  • The amount of equity you can protect with the home. You have a better chance of keeping your home if all or most of your equity can be protected, with an exception.
  • Your ability to continue making mortgage payments after bankruptcy is key. If you can demonstrate to the court that you can continue to pay your mortgage, they will not accept the creditor’s requests to lift the automatic stay.

If you are behind on your mortgage, losing your home may be inevitable. The automatic stay provided by chapter 7 Bankruptcy can temporarily stop a foreclosure. Since a mortgage is a secured debt, you cannot wipe it out with Chapter 7 Bankruptcy. Your creditors could petition the court to lift the automatic stay and allow the foreclosure to proceed when you file. If you want to keep your house, you need to be sure to continue paying your monthly installments.

The best chance to keep your home is by filing Chapter 13 Bankruptcy. Unlike in Chapter 7, Chapter 13 Bankruptcy allows you a way to catch up with the mortgage payments. If you have more equity than you can protect with an exception, you can pay your creditors the value of the non-exempt equity.

Bankruptcy Could Affect your Employment Income and Business

As a criminal record, bankruptcy is a public record that potential employers and creditors could see. Although you could view bankruptcy as a way to reorganize your financial life, the situation can be very embarrassing. Some people will view it as an inability to pay your debt and credit unworthy. If you seek employment where financial responsibility is critical, your employer could use your bankruptcy status to deny you the job.

Bankruptcy Does not Release you from All your Debts.

Although bankruptcy offers you relief from your debts, it is essential to understand that not all debts can be discharged through bankruptcy. Non-dischargeable debts are those that you cannot eliminate under the US Bankruptcy Code. Some debts are non-dischargeable because of incurred, while others cannot be discharged because of public policy interest.

Therefore, if you were hoping to put the non-dischargeable debts behind you, you will suffer the consequences of bankruptcy and still pay the debt. Some of the common non-dischargeable debts include:

  • Child Support and Alimony

Domestic support debts like child support and spousal support are considered non-dischargeable debts when you declare bankruptcy. Child support and alimony are some of the debts protected by public policy. Also, these debts are an exemption of the automatic stay, and you must continue to pay them even in the middle of a bankruptcy proceeding. If the family court is garnishing your wages for unpaid child support, filing for bankruptcy will not stop the garnishment.

When you file for Chapter 7 bankruptcy, the bankruptcy trustee will sell your assets to cover some of your debt. Child support and alimony are given priority when covering debts from the proceeds of selling your property. However, when you file for bankruptcy under Chapter 13, you can make a repayment plan which allows you to pay your past-due child support payments.

  • Student Loans

Whether you file Chapter 7 or Chapter 13 bankruptcy, you cannot eliminate your obligation to pay your student loans. However, there are some instances where you can discharge all or a portion of your student debts. Requirements for student loans to be discharged in bankruptcy are often challenging to meet. You must prove to the court that paying for these loans will put you in financial hardship and make it impossible to meet your basic needs.

Additionally, you must show that the difficult financial situation you are in is expected to continue for a while. If these facts are true, your effort to pay the loans must be apparent. Since most people have past-due student loan payments, proving that you made an effort to pay off the debt could be challenging. Therefore, you will still be required to pay the loans even after declaring bankruptcy.

  • Income Taxes

In most cases, bankruptcy arises when a person loses their job or the nature of their income changes. However, you cannot eliminate recent income tax bets by filing for bankruptcy. Like with student loans, income tax debts survive a chapter 7 bankruptcy. When you file under Chapter 13, you can pay off the debt through a bankruptcy repayment plan. Although some income tax debts can be discharged in Chapter 7, you must file for bankruptcy at least three years after the due payment date of the debts.

All tax debts assessed within the last 240 days from filing the bankruptcy cannot be discharged. If the IRS can prove that you have committed tax fraud through evasion or an attempt to evade it, you cannot eliminate your income tax debt under any circumstances. If you have accumulated a considerable tax debt, you need to consider legal guidance to weigh your bankruptcy options.

  • Secured Debts

Secured debts are the debts that are attached to a property or an asset. Outside the bankruptcy, if you fail to pay a secured debt, the property attached to it could be repossessed. Therefore, you cannot stop making your payments and keep the assets because you filed for bankruptcy.

  • Debts associated with DUI accidents

If you cause an accident while driving under the influence of alcohol or drugs, the accident victims could file a personal injury claim against you. Even when you file for bankruptcy, your obligation to compensate the victim for their injuries will not be eliminated.

Destroys your Credit Score

Bankruptcy helps you restructure your financial life by eliminating your debt or allowing you to may a repayment plan. However, the bankruptcy status appears on your credit report for many years and affects your credit score. Bankruptcy impacts your credit score more than any other single financial event.

Your credit score is one of the most significant determinants of whether you receive credit, your amount of credit, and your interest rates. Having a high credit score means that you can borrow more money and lower interest. Filing for bankruptcy can cause your credit score to drop dramatically. Having filed for bankruptcy could warn potential lenders about your troubled debt repayment history. 

Some creditors could deny your credit application, while others offer you the credit with unfavorable terms. Your debt payment history makes up 35% of your total credit score. If you already have an inconsistent payment history, filing for bankruptcy may not make a huge difference.

The Chapter of Bankruptcy you file could affect the amount of time the status remains in your credit report. If you file Chapter 7 or 11, the bankruptcy status will remain in your credit report for up to ten years. On the other hand, Chapter 13 Bankruptcy will stay on the report for up to seven years after the bankruptcy proceedings end. Sometimes, your credit score may fail to hold a bearing on your ability to obtain credit. This is because some lenders do not grant credit to individuals who have been through bankruptcy regardless of their credit score. 

You Cannot Stop Legal Action Through Bankruptcy.

Declaring bankruptcy can be a potent tool. With the automatic stay, you can prevent creditors from any form of debt collection actions. However, it is essential to understand that some lawsuits cannot be stopped by filing for bankruptcy, including:

  • Criminal action. A criminal case against you must proceed regardless of the automatic stay offered by Chapter 7 Bankruptcy since your illegal activity is not in any way related to the debt you owe. Therefore, the prosecution can continue as you undergo bankruptcy.
  • Support and dissolution cases. Filing for bankruptcy does not stop a divorce proceeding. Additionally, the bankruptcy issues will not affect the matters of family court regarding child support and alimony payments.

Psychological Distress

Money cannot provide happiness. However, it could inspire a rollercoaster of emotions, including grief, shame, and sadness. Chapter 7 Bankruptcy is the most common type of Bankruptcy in the United States. The liquidation Bankruptcy involves handing over all your non-exempt assets for liquidation. While the financial consequences of bankruptcy can be very challenging to deal with, the mental burden of the bankruptcy process is overwhelming.

The pain of watching your hard-earned asset be liquidated to pay creditors is a lot. If you are behind on your mortgage, your lenders could seek to foreclose your home, leaving you nowhere to go. When you undergo bankruptcy, you are likely to concentrate more on the financial steps, including compiling a list of your debts, seeking legal guidance, and seeing the process. Ignoring the emotional consequences of bankruptcy could have long-term effects. Many people who declare bankruptcy have most likely exhausted all the debt relief options and are emotionally exhausted.

Bankruptcy is not something that anyone wants to fall into. However, it can give you space to breathe and start fresh. Many people associate bankruptcy with poor financial decisions. If you have never been through the bankruptcy process, you could suffer the stigma associated with the process. For this reason, people could be ashamed to accept that they are undergoing bankruptcy. Instead, they bottle up the feelings of anxiety and stress, which makes the situation worse.

Your Cosigners will Be Responsible for Some Debts.

In most cases, creditors will require you to have a cosigner when they give you a loan. A cosigner or guarantor is responsible for covering your back debt if you cannot pay. First-time borrowers with a poor credit score will most likely not acquire credit without a guarantor. Your bankruptcy discharge eliminates your obligation to pay your debts. However, it does not eliminate the cosigner’s liability on your debts.

When you file bankruptcy under Chapter 7, all creditor attempts to collect the debt will stop. However, the automatic stay will not apply to the cosigners. Therefore, your creditors will be free to pursue them and collect the debt. If you want to protect your cosigners from collection efforts by creditors, you can either:

  • Pay the Debt

When you file for liquidation bankruptcy, you do not have an obligation to pay any discharged debts. However, you can still choose to pay off the debts to protect your guarantors. It is essential to understand that creditors will require your guarantors to make monthly payments and cover the outstanding balance on the debts.

  • Reaffirm the Debt

You can reaffirm your secured debts before the bankruptcy discharge. Reaffirming a debt means giving up the discharge benefits and taking responsibility for the debt. Unless you need to keep an asset, it is not advisable to reaffirm a debt. Allowing your cosigners to suffer the effects of your debts by filing for chapter 7 bankruptcy could create a strain in your relationships. Also, you could find it challenging to convince the person to cosign a loan for you in the future.

Is Bankruptcy the Right Option for Me?

Bankruptcy is not the right option for everyone. Whether or not declaring bankruptcy is the right solution for your debts and financial difficulties depends on your situation, the amount of debt you owe, and how much property and assets you hope to protect by filing. Additionally, there are several types of bankruptcy, and each provides relief differently. Therefore, finding the right bankruptcy lawyer is crucial if you are considering bankruptcy. The bankruptcy attorney could help you decide whether or not to file for bankruptcy. Also, they will help you explore other alternatives such as:

  • Seeking help from a government-approved credit counselor or debt management plan
  • Take a debt consolidation loan
  • Negotiate with creditors to create a payment plan outside the bankruptcy arrangement
  • Borrow money from family and friends

If you decide that bankruptcy is the only hope for you to rebuild yourself, your attorney will help you decide on the best type of bankruptcy. Additionally, if you choose to file, an attorney can guide you through protecting your property and ensuring that creditors do not violate your rights.

Find a Skilled San Diego Bankruptcy Attorney Near Me

For some individuals or businesses, declaring bankruptcy helps relieve debts that seem unpayable. Bankruptcy is the legal proceeding through which you can either eliminate your debts or create a plan to pay them comfortably without pressure from creditors. The decision to file for bankruptcy is not easy. Bankruptcy is a process with rules and requirements that must be met. Bankruptcy should always be the last option when you are in a financial crisis. This is because it could create more financial challenges than what it solves.

Before you settle your decision to file for bankruptcy in California, it would be wise to consult with a competent bankruptcy attorney. Your attorney will help you assess your situation and determine whether bankruptcy is the right option given the circumstances. At San Diego Bankruptcy Attorney, we will offer you the much-needed legal guidance ad representation to navigate the bankruptcy process and ensure that you make the right decisions. If you consider filing for bankruptcy in San Diego, CA, you will need us by your side. Call us today at 619-488-6168 to discuss your situation.