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What to Know Before Filing for Bankruptcy

Bankruptcy Tips

Some see bankruptcy as nature's eraser, while others condemn it as the single greatest mistake in life. But what's the truth? There are consequences to bankruptcy for sure, but there are unexpected positives that can help struggling individuals get back on their feet.

Bankruptcy isn’t something to rush into, though. Bankruptcy is a complicated process that involves courts, lawyers, and possible repayment requirements.

It also has long-lasting effects and consequences that must be considered. Almost every aspect of life is affected by declaring bankruptcy. Considerations have to be made at every level, even in things like bankruptcy and life insurance.

What is bankruptcy?

The best place to start when considering bankruptcy is to understand exactly what it is. Bankruptcy, in its simplest terms, is a legal process taken when a person or business can’t pay back debt.

When an individual declares bankruptcy, they work through a process of discharging debt and surrendering assets to help pay back their personal debt. This process is complex and takes some time. The specifics of the procedures depend on the case and the type of bankruptcy being sought.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often considered “full bankruptcy.” This type of bankruptcy is the process of liquidating debt and assets. There is no repayment obligation for people who select Chapter 7.

This type of bankruptcy should be used as a last resort. It usually has much harsher consequences on credit and future endeavors.

Chapter 13 Bankruptcy

Chapter 13, on the other hand, is the process of reorganizing debt to make it more manageable for debtors. Individuals who go through a Chapter 13 bankruptcy are responsible for paying back the debt they have accumulated, but in smaller sums three to five years.

The specifics of the repayment plan and what has to be repaid are determined by the bankruptcy court and will vary from case to case.

What are the long-term effects of bankruptcy?

Bankruptcy is an incredibly personal decision and process. People choose bankruptcy for several different reasons, whether it’s bad financial choices or unforeseen circumstances. The good news is bankruptcy is not a death sentence. It doesn’t keep you from living life, but there are some serious long-term effects to consider before choosing the bankruptcy route.

Many of these effects are both positive and negative. This makes the choice of bankruptcy more complicated and complex. It’s important to weigh the advantages and disadvantages of every aspect of bankruptcy before moving forward with the process.

What happens to my property in bankruptcy?

Because bankruptcy is initiated by a debtor, there are creditors who will be losing out on money they expected to be returned. To offset some of the loss, the bankruptcy may require debtors to sell some of their assets.

Negative Effects on Property

The bankruptcy court will assess the amount and condition of property like cars and homes. In many cases, these assets will be sold off to repay some of the accumulated debt. The debtor will be left with very little and will need to find other means of transportation or lodging.

The loss of these necessary assets can be debilitating. Families need places to live and people need transportation to provide for their needs. Luckily, there are legal ways to protect some of these vital entities.

Some types of property are exempt from bankruptcy proceedings. As a debtor, you can safeguard your more necessary assets. This keeps the court from selling off cars and homes while still discharging other debt.

Positive Effects on Property

On a more positive note, the bankruptcy process can help people keep their homes and work toward financial freedom. The bankruptcy proceedings create an automatic “stay.” This means creditors must stop attempting to collect debt and all evictions or foreclosures are halted. 

Depending on the situation, type of debt, and type of bankruptcy, debtors can use this legal process to pause legal action by creditors and establish repayment plans. While this is possible and has been used by many people in the past, it’s important to consult a bankruptcy professional.

Will bankruptcy affect my job or future employment?

Even though bankruptcy is a personal matter, it’s not always private. Bankruptcy is public information, meaning it can be found by anyone who is looking for it. This most directly affects employment and future job opportunities.

 If you choose to declare bankruptcy, it could negatively affect your current employment. In some cases, employers are less likely to promote an individual who has had financial problems in the past. It may take you longer to accomplish long-term employment goals.

This can also follow you when seeking new employment. Once again, employers can view your credit history, and bankruptcy could be a red flag. It doesn’t mean you won’t ever find employment again, but there could be missed opportunities early on or probationary periods.

Bankruptcy and Court of Public Opinion

The court of public opinion is often a consideration. The way people perceive and judge others for mistakes or choices can be difficult to overcome. Bankruptcy is no different.

Negative Associations of Bankruptcy

There is a stigma around bankruptcy proceedings and individuals who choose to go that route. Others are not aware of the time and consideration put into making this kind of decision. People can be quick to judge and slow to understand.

This can affect people mentally. There can be feelings of failure that some feel after choosing bankruptcy or a fear that this same set of circumstances will happen again. These are natural feelings but should not be internalized.

Mistakes are made and unforeseen circumstances arise. Bankruptcy can be freeing, not a sign of failure.

Positive Associations of Bankruptcy

The positive side effect of declaring bankruptcy is the sense of relief. When people are drowning in debt, it feels like there is no rescue or way out. Bankruptcy offers that clean slate and a chance to restart.

Bankruptcy is not, however, a get-out-of-jail-free card. Part of the discharge procedure is financial counseling and support. The hope is that bankruptcy is not a recurrent choice. The court and creditors want to see individuals learn how to avoid bankruptcy court in the future.  

How does bankruptcy affect my credit?

Many people are aware of the ramifications of a bankruptcy on their credit. It’s true that bankruptcy can and does have immediate and long-term effects on an individual's credit score and report.

Negative Effects on Credit

In many cases, a bankruptcy will immediately reduce an individual’s credit score. Long term, a bankruptcy stays on your credit report for seven to 10 years. Even if you have worked hard to repair your overall score, the original bankruptcy will still be visible on your credit report.

Your credit score and report are used to determine eligibility for credit cards, mortgages, and other types of loans. After a bankruptcy, creditors may be less inclined to approve your application for these types of loans. If you can obtain credit and loans, then your interest rate will most likely be much higher.

Your bankruptcy can also negatively affect other people in your life. If you have had spouses, partners, parents, or other personal connections cosign loans or open joint accounts, they may be on the hook for repayment or other legal judgments. These joint accounts may be forcibly closed out or garnished. It’s important to discuss the possibility of bankruptcy with anyone you relate to financially.

Positive Effects on Credit

There are ways to repair your credit, however. If bankruptcy is the best course of action in your situation, then there are tried and true methods and programs. In some situations, people can start improving their credit score immediately. The discharging of some debt allows them to focus on other pieces of debt and begin making larger payments to pay it off. 

Insurance Considerations with Bankruptcy

Like credit and loan considerations, bankruptcy can have negative effects on your insurance coverage or options. Life insurance companies take bankruptcy proceedings very seriously.

If you have a life insurance policy before you declare bankruptcy, then it will most likely be surrendered during the bankruptcy proceedings. These types of policies are considered assets, so creditors can seize them as a means of repayment. This can leave many people worried about future policies and scope of coverage.

Bankruptcy can make a person eligible for some policies or insurance companies. Fortunately, there are many companies out there willing and able to provide this coverage to people who have declared bankruptcy in the past.

The type of bankruptcy and when you are searching for life insurance can determine coverage and policy specifics. Knowing a bankruptcy can and will affect your eligibility will make it easier to start the search process.


Laura Gunn is an insurance and finance expert who researches and writes for the life insurance comparison site, She is a survivor of bankruptcy and is passionate about informing others about the process.

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