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Long-Term Effects of Bankruptcy

We spend a lot of time here reassuring clients that bankruptcy is not the end of their financial lives and that many individuals and businesses come out of bankruptcy with improved financial health. This is absolutely true and we stand by it. But it is also important for people to recognize the gravity of the decision to declare bankruptcy. The bankruptcy process does have many downsides and is not a decision one should take lightly. It can have a substantial impact on your creditworthiness and can also necessitate liquidation of many assets. And rebuilding trust following a bankruptcy is an important part of the process that can continue long after the formal court proceedings end.

The most frequently cited long-term effect of bankruptcy is the impact it has on your credit score. Your credit score is essentially a broad analysis of your reliability as a borrower translated into a number. If you make payments on time and pay off your debts, it goes up. If you make late payments or default on financial obligations, it goes down. Since bankruptcy — even Chapter 13 and Chapter 11 — usually allows you to discharge or reduce many of your debts, this raises your riskiness for potential lenders. That is why bankruptcy generally has a substantial adverse impact on your creditworthiness.

Under the Fair Credit Reporting Act, a bankruptcy can appear on your credit report for up to 10 years. And having a bankruptcy on your credit record can make it difficult to obtain unsecured loans or lines of credit such as credit cards. Even for secured loans and lines of credit, having a bankruptcy can lead to higher interest rates. Nevertheless, in a difficult economy lenders are more willing to cater to those with a troubled credit history and give individuals and businesses recovering from bankruptcy options to secure financing and rebuild their creditworthiness.

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