Filing for bankruptcy isn’t something most people are willing to do. But, when push comes to shove, declaring bankruptcy can be your only way out of debt. While there are plenty of positives that come with declaring bankruptcy, there are also several disadvantages that come from going through the process.
It’s vital for any individual filing for bankruptcy to understand that this process isn’t all rainbows and sunshine. It does, however, offer you a fresh start, especially if you are mired in debt. If you hire a reliable bankruptcy law firm, they can ensure that your case gets through the process smoothly, and guide you on how to rebuild your credit.
But, before we can take a look at what you stand to lose by declaring bankruptcy, let’s take a look at a few things you should know about it.
Bankruptcy Basic
Most people are sometimes too afraid to file for bankruptcy because it is a complex process and one you cannot do without proper assistance. You still, however, need to know the basics of bankruptcy like the requirements needed, and they include:
- Documentation that you aren’t able to repay your debts
- Statement of affairs where you list your income, liabilities, and expenses
- Complete credit counseling with a licensed insolvency trustee.
- File monthly expenses and income
- File your tax returns for the year you are filing bankruptcy.
It’s also important to note that filing for bankruptcy doesn’t wipe your slate completely in some types of unforgivable debts. The types of debts bankruptcy can’t eliminate are:
- Spousal and child support
- Apprentice and student loans that are less than seven years old
- Court-ordered restitution payments and fines
- Debts that are a result of embezzlement, fraud, or misappropriation
- Several government overpayments
What do You Lose When You File for Bankruptcy?
Remember, the goal of declaring bankruptcy is to help you eliminate debts that you can’t pay. Bankruptcy forgives those debts, ensuring you never have to worry about any of them again. But, before you declare bankruptcy, it’s important to understand what you will lose in the process.
So, here’s what you are bound to lose when you declare bankruptcy.
Your Home
Owning a home is almost everyone’s dream. But, what happens to your home when you file for bankruptcy? Sometimes, depending on your financial situation, you could lose your home. It’s pretty expensive to own a home, as you have to make payments from property taxes to mortgage payments.
You also have to pay electricity, maintenance, and gas bills. And depending on the size of your house and where you live, these costs may be significantly higher.
However, to lose your home, your house needs to have a lot of equity by the time you are filing for bankruptcy. You can calculate your home’s equity by taking your house’s value and subtracting that with the amount of mortgage you owe and your current property taxes.
House value – current property taxes – the amount you owe on mortgage = Equity
If your home has a high equity value, it will be sold, and the value will be given to your creditors. After all, it wouldn’t be fair to your creditors for you to keep the money while still discharging their debts.
But what if your house has very little equity? If you have re-financed or recently mortgaged your home, there’s a high likelihood that your house may have very little equity. In such cases, you get to keep your home, as there may not be enough money to pay your debts off.
You also have to continue paying your mortgage, but you need to figure out how to make those payments even when filing for bankruptcy.
Your Car
There is a likelihood of losing your car when you file for bankruptcy. However, that depends on whether you can keep up with your car payments, how much you owe, and the worth of your vehicle. If the equity of your car is relatively high, then your vehicle will be sold.
But if you are behind on your payments, you may end up keeping your car. When filing for bankruptcy, it’s always advisable to try and keep your vehicle, as it will be pretty challenging to qualify for a car loan after that.
Your Credit Score
Another aspect you risk losing when you file for bankruptcy is your credit score. Filing for bankruptcy can damage your credit, as it affects the way future lenders view you. A bankruptcy claim tends to prompt creditors to decline from extending credit and lower interest rates.
But, if you find a lender willing to take the risk, you may most likely end up with less favorable terms and higher interest rates.
So, before you rush to declare bankruptcy, check if there are other strategies available you can use to settle your debts.
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