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Bankruptcy is typically considered a last resort option for people suffering financial hardship, and for good reason. Going through bankruptcy can give you a chance to get your finances in order, and possibly even get a clean slate—but it also has negative consequences that can affect your possessions and make it difficult to get approved for credit for years.
Here's what you need to know before you file.
What Happens When Declaring Bankruptcy?
If you're struggling financially, bankruptcy gives you the opportunity to pay down a portion of your debts over time or have some of them eliminated entirely.
Either way, declaring bankruptcy grants what's called an automatic stay, which is essentially a block on your debt to keep creditors from trying to collect. They can't deduct money from your bank account, garnish your wages or go after any of your other assets.
You'll then have time to work with the court and your creditors to determine the next steps.
Will I Lose My Property?
What happens to your property depends on whether you file chapter 7 or chapter 13 bankruptcy. If you're not sure which option is right for your situation, see "Bankruptcy: Chapter 7 vs. Chapter 13." Here's what to expect based on which route you choose.
Chapter 7 bankruptcy is often called liquidation bankruptcy because you will likely need to sell off some of your assets to satisfy at least a portion of what you owe.
That said, state laws determine that some assets, such as your retirement accounts, house and car, are exempt from liquidation. Check with a bankruptcy attorney in your state to find out what property you would be allowed to keep.
With a chapter 13 bankruptcy, you don't need to worry about needing to sell off any of your property to satisfy your debts. Instead, your debts will be reorganized so that you can pay them off partially or in full over the next three to five years.
Keep in mind, though, that if you don't comply with the payment plan, your creditors may be able to go after your assets to satisfy your debts.
What Happens to My Credit if I Declare Bankruptcy?
When you declare bankruptcy, it's a sign that you are no longer paying your debts as originally agreed, and it can seriously damage your credit history. That said, the two types of bankruptcy aren't treated the same way. Because chapter 7 bankruptcy completely eliminates the debts you include when you file, it can stay on your credit report for up to 10 years.
While chapter 13 bankruptcy is also not ideal from a credit standpoint, its setup is viewed more favorably because you are still paying off at least some of your debt, and it will remain on your credit report for up to seven years.
Shortly after your bankruptcy is discharged by the court—meaning you no longer owe the debts you've included in your filing—it may be difficult to get approved for credit, especially with favorable terms. There are some lenders, however, who specifically work with people who have gone through bankruptcy or other difficult credit events, so your options aren't completely gone.
Also, the credit scoring models favor new information over old information. So with positive credit habits post-bankruptcy, your credit score can recover over time, even while the bankruptcy is still on your credit report.
Are Bankruptcy Filings Publicly Available?
Bankruptcies are considered a public record, but that doesn't mean everyone's going to know about it. Bankruptcy proceedings are filed in a system called Public Access to Court Electronic Records, or PACER for short.
For the most part, it's more common for attorneys and creditors to use this system to look up information about your bankruptcy. But anyone can register and check if they want to. The service charges 10 cents per page to access case information.
Another way people might find out about your bankruptcy is if your local newspaper publishes public notices.
Finally, employers, landlords and creditors may be able to see on your credit report that you've filed bankruptcy when you apply for a job, an apartment lease, or a loan or credit card.
Will Bankruptcy Affect My Job or Future Employment?
Twenty-nine percent of employers run a credit check on new job applicants, according to a survey by CareerBuilder. As a result, declaring bankruptcy could affect your ability to get a new job, especially if that job is in the financial services industry or with a government entity.
They do this primarily to make sure you're a good fit for the jobs—such as handling money—and that you're not financially stressed, which could increase the likelihood of theft or fraud.
If an employer simply runs a routine criminal background check, however, your bankruptcy won't show up.
It's less likely that employers would conduct background checks on current employees. So if you're not planning to switch jobs, you likely don't need to worry much about a bankruptcy affecting your employment.
Keep Track of Your Credit During the Process
Because declaring bankruptcy can affect your credit history and ability to do certain things in the future, it's important to monitor your credit scores during the process and as you work on recovering from the ordeal.
As you do so, watch how certain actions affect your credit scores and look out for potential errors and negative information that might influence your score negatively. If you do find something that doesn't belong on your credit report, dispute it with the credit reporting agencies.
As you keep track of your credit score during and after bankruptcy, you'll learn better how to improve it over time and keep it in a good place going forward.
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