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What are the financial repercussions of filing for bankruptcy?


Bankruptcy is a way to get out from under debt that you – and a judge – are convinced is unable to be repaid fully under any circumstances that are likely to occur. It’s a way for someone to get a financial fresh start, but it turns out that the start isn’t entirely fresh. Debts are typically reduced or eliminated in bankruptcy, except in cases of fraud, but there are ramifications to filing for bankruptcy that are bound to stay with you for many years.
The most obvious and immediate impact of a Chapter 7 filing, one of the two most common types, is that the filer is relieved of all debts but must surrender most assets to the court to be distributed to creditors. Certain property is exempt, however. It varies from state to state, but most states exempt some home equity, a car up to a certain value, personal items, work tools and substantial assets in an individual retirement account. Under federal law, assets in 401(k) and similar accounts are exempt, too. In a Chapter 13 filing, debtors keep their assets but must adhere to a court-ordered plan, which may last five years, to repay a portion of their debt.
That is unlikely to be the only lasting effect of a bankruptcy. It probably will be more difficult or at least more expensive to obtain credit, as a bankruptcy stays on your credit report for 10 years. Perhaps more important, especially for someone trying to get back on his feet, is that employers often ask job applicants, particularly in fields related to law or financial services, if they have ever been bankrupt. It’s a reasonable question; while hard times undoubtedly precipitate many filings, bankruptcy can also be a sign of poor judgment or difficulty in handling one’s financial affairs. A “yes” could significantly limit the chances of getting hired when they need a job the most.
-Conrad de Aenlle