With many Americans still struggling in terms of finances, bankruptcy continues to be a very real possibility. It seems to make sense to “clean the slate” and start fresh with your finances. However, bankruptcy doesn’t always mean that you are set when it comes to clearing your financial reputation.

Before you decide to try to improve the situation with bankruptcy, consider the consequences of such a move.

Social Stigma

It’s true that a lot of the social stigma attached to bankruptcy has been disappearing in recent years. With so many people on the financial ropes, declaring bankruptcy just doesn’t carry the same baggage that it used to. For some, though, there is still discomfort attached to bankruptcy.

Even if your friends and family don’t give you a hard time about it, you could still end up battling your own demons when it comes to bankruptcy. None of us likes to feel as though things are going badly, and it can be disheartening to realize that you have to file for bankruptcy in order to put your finances back in order. Don’t underestimate the emotional impact that filing for bankruptcy can have you and your situation.

Financial Impact

Even though many people think of bankruptcy as something that “fixes” your financial situation, it’s important to realize that this isn’t always the case. You can still feel a financial impact when you file for bankruptcy. Some of the long-term effects of bankruptcy include:

  • Chapter 7 bankruptcy remains on your credit report for up to 10 years.
  • Chapter 13 bankruptcy reamins on your credit report up to seven years.
  • Your credit can take two to three years (or more) to recover as you try to engage in good habits.
  • Your credit impacts what you pay for loans, and can also impact your insurance premiums. Bankruptcy can mean you pay higher rates.
  • You might not be eligible for some loans — especially mortgage — at all for some period of time after completing a bankruptcy.
  • Even though employers aren’t supposed to reject you based solely on bankruptcy, when it is included on your credit report, it can still be a red flag.

As you can see, it really isn’t a true “clean slate.” You could easily find yourself continuing to pay a price for bankruptcy, even years after everything is settled. A bankruptcy continues to impact your situation, and it can cause you financial grief even years later.

Weigh the Consequences

While bankruptcy can be a legitimate way for some to find a fresh start with the financial situation, it’s important to make sure that you weigh the consequences thoroughly before making a decision. Consider your financial situation, and what you hope to accomplish in the next few years. Also, think about the emotional impact bankruptcy will have on you.

You can consult a knowledgeable attorney to help you work through the details. In many cases, though, it is best to look for alternatives to bankruptcy first. You need to fully understand what you are getting into before you take the plunge and engage in bankruptcy.



Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.