Declaring personal bankruptcy is not something to be considered lightly. If you are having financial difficulties that have you considering taking this ultimate step, take a moment to consider some of the fall out from going with this option. Both individuals and businesses are allowed to file for bankruptcy under current laws. In an effort to provide creditors with some form of restitution without overly penalizing the party who cannot pay, the government created bankruptcy as a viable alternative. In less hospitable times, they used to throw people into debtors prison. Thank goodness that has long since been done away with. Yet, a huge debt burden can often feel like youre inside of a financial prison with no way out.

Feelings of stress and depression are common when you have a seemingly overwhelming debt to pay, but know you dont have the means to make good on much of it. Filing for personal bankruptcy is a last resort option that can look like a quick and easy way out of your money troubles. But, lets take a deeper look at the hidden cost of filing for bankruptcy.

The Filing Process

The laws and legal requirements of filing for personal bankruptcy vary from state to state, so this is something that you should not attempt to do on your own. You should consult with an experienced bankruptcy attorney who knows the system and is up on current bankruptcy law. Recently, the terms for bankruptcy have been revised, which makes it is much more difficult for individuals to file for Chapter 7 bankruptcy, which protects you from having to pay back most of the debt to creditors. Instead, its a lot more common to be steered towards Chapter 13, which requires you to pay back all of your creditors over time.

Again, an experienced attorney should be able to consult with you on the best course of action to take. Also, depending on your individual situation, it will cost you anywhere from $200 $2,000 or more to have a filing done on your behalf. The more complex your situation is, the higher the expense.

Liquidation of Assets

Should you file for bankruptcy under Chapter 7, you must provide a list of all of your assets, including household items, clothing, collectible items, cars and other transportation vehicles, tools and so forth. The court will then review your total assets and determine which items are essential (clothing, some appliances, tools needed for work, etc.), and which are non-essential (gaming console, computers, TVs, motorcycle, etc.) to your daily life.

All non-essential items can be liquidated or sold off to other parties in order to raise money to pay off your creditors. Under this scenario, the creditors will have to settle for whatever amount they can get, which may be 50% or less of what is actually owed.

In order to go through this process, youll really need to accept that many things that bring you enjoyment will be sold in order to cover your debt. For instance, if you are really attached to grandmas antique china, which was passed down to you from your mother, youll most likely lose this non-essential item. Ditto for things like a valuable coin collection or that restored 1950s Chevy.

Long-Term Bad Credit

A bankruptcy stays on your credit record for 7 – 10 years. Thats quite a long stretch of time to have to live with the stain of bad credit. During this period of time, it will be extremely difficult, if not impossible, for you to get anyone to loan you money to purchase a home, car or other big ticket items. Unsecured credit cards with large spending limits will also be a thing of the past. As far as the world is concerned, your credit worthiness is in the mud.

Diminished Employment Prospects

Another hidden cost of personal bankruptcy is having it appear on your credit report where others can see it. The risk of having a current or potential employer get wind of your bankruptcy is very high. In fact, a whopping 50% – 70% of all employers now do some sort of credit check as part of an overall background check for employment purposes.

What this means is that if you should apply for a promotion or job change within your company, you may be subject to another background check where your employer finds out you have this bankruptcy on your record. Particularly if you have a government job, this is more likely to happen than not. Or, if you are currently unemployed and searching for a job, a potential employer can take a look at that bankruptcy and determine you are not trustworthy enough for their needs.

Okay, now you should know that its technically illegal for employers to discriminate against anyone who has filed for personal bankruptcy. As a mater of fact, if they are having doubts about your employability after viewing your bankruptcy information, they are supposed to send you a pre-adverse action disclosure form, which gives you an opportunity to fix any incorrect items on your credit report. Similarly, if an employer chooses to fire you over a bankruptcy, they must send you an adverse action notice, which gives you the right to dispute any incorrect credit information within 60 days.

Unfortunately, both scenarios dont protect you from employment discrimination over a bankruptcy if the employer decides to cover their tracks. They can simply claim to not hire you or fire you for other reasons. It is very difficult to prove that your bankruptcy is the reason you are not able to obtain gainful employment.

As the above points demonstrate, choosing to go down the road of personal bankruptcy involves taking certain risks that can make life much more difficult for you.  

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