Major Consequences of Bankruptcy

Bankruptcy is something that no-one wants to go through during their lives as it can be a painful process that causes a lot of stress and uncertainty, however, on the flip side, it can allow you to rearrange your finances and come through the other side in a much stronger position. It is important that you understand the positive and negative impacts of entering bankruptcy in advance, and then you can consider whether it is the best course of action for your situation. We will now take a look at the major consequences of bankruptcy.

Loss of assets

The first thing that one should be aware of is that when entering bankruptcy there is going to be some loss of assets involved, often a major loss of assets. You are not going to be stripped of your basic possessions such as the roof over your head or your personal effects, however, you can expect to lose any equity in the house if you do not have a mortgage or if the mortgage is small. Any other assets you own will also come into consideration, for example, a car or personal items of high value such as Swiss watches. You will also lose any pension contribution you have made for the tax year and any tax rebates you are owed that are still outstanding.

Given these facts, it is wise to work out whether you may be better off by selling your assets and paying down your loans, rather than going through with the bankruptcy procedure, especially given the other negative consequences that we are now going to discuss.

Credit status

Going into bankruptcy is seriously going to affect your ability to borrow money in the future. For first time bankrupts, there will be a black mark against your credit rating for 6 years, for any subsequent case, it is 14 years. This means that you will no longer be able to secure credit for any type of loan, from a mortgage to a car purchase to financing the cost of a new sofa. All of these things will be beyond you for a significant period of time. Can you survive living without credit? These should be the questions you are asking yourself before committing to bankruptcy. Of course, you may be in an unavoidable situation, nevertheless, if there are alternative options these should be explored at all costs.

Legal duties and requirements

Once you have gone through the bankruptcy process you are not yet out of the woods, you still have certain legal obligations, such as reporting your monthly income. The income you are allowed to keep depends on many factors, however, broadly speaking, if you earn over a level set by the government then you will be required to pay back the surplus. This means that no matter how successful any of your future ventures are, you will be paying back extra monies to your creditors, so it could be very costly for you in the long run. This is another reason why it is important to carefully analyze your personal situation before entertaining bankruptcy.

No more debt

All along you have been thinking that there must be a positive to bankruptcy otherwise there would be no point entering it, and you are right. The major reason that people become bankrupt is to eliminate their debts and to start afresh. It is important, though, at this stage, to mention that not all debts are cleared. Any debts relating to child support or alimony or court fines will remain on your record and you will have a legal obligation to continue repaying them. If you continue to have a mortgage this will also be a debt that you must pay. On the positive side, all other debts are wiped, from what you owe the Inland Revenue to any credit card debts or unsecured loans. This is why the majority of people will choose to go bankrupt, to eliminate that black cloud hanging over their head, no more knocks on the door demanding payment, and no more threats of legal action. This can be a godsend and can finally allow you to sleep at night. 

As we have discovered there are many negative consequences of bankruptcy: you will struggle to find credit for at least 6 years and will lose many personal assets, possibly including your home. You also have the added disadvantage that if you are successful in the future you will have to pay back more of your income to creditors. However, on the positive side, you will live debt-free which delivers huge peace of mind. Choose wisely and study all options before deciding to enter bankruptcy.  

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