Effect of Bankruptcy on Personal Finance
Filing for bankruptcy is always considered the last resort; nevertheless, it indicates that you are ready to take the onus and get out of the financial mess. However, if you file for bankruptcy, the same gets recorded in your credit report for a period of 7 to 10 years. Your credit report is an indicator which shows how you have managed your personal finance down the years. There may be financial upheavals on the way; you should try to take it into your stride. How you manage your personal finance today will have a cumulative effect over the years. If your credit report shows that you have filed for bankruptcy, your chance of getting new credit diminishes. Moreover, a damaged credit report can act as a hindrance in getting employed at a good place or may deprive you of enjoying financial benefits.
A condition in which your income is less than your debts is not an uncommon scenario. There are many people who tend to fall into debts despite the fact that they earn a lot. When you have reached a point when you have spent almost everything and have nothing left to pay the creditors, you are bankrupt.
If you have assets locked in long term plans
If you have locked your assets in retirement plans, CDs or certificates of deposit and any other investment vehicle (long term), you may or may not be able to save your assets when you file for bankruptcy. Consult your bankruptcy lawyer to find out how you can get optimum protection for your assets. You should plan out your personal finance strategically depending on your low credit rating and your capacity to borrow.
In case you have most of your assets locked in retirement benefits, it is better you file for Chapter 13 bankruptcy. You can use the 5 years reorganization plan to pay off creditors.
If you have invested in shares
If you are investing in shares, you may be anticipating a good return on investment. However, with the increase in the number of companies filing for bankruptcy, your personal finance may receive a set back too. If one sector of the economy or a company or for that matter country gets affected, the net asset value of a fund is also affected. The securities market may get a jolt. So, it is best to have a diverse investment portfolio.
Your retirement benefits in bankruptcy
The retirement plans that have anti alienation clause, a provision that does not allow creditors to attach the retirement funds and the proceeds cannot be used to pay off creditors. 401K savings as well as pensions which qualify for Employee Retirement Income Security (ERISA) and even the federal pension savings act have anti alienation clause and the proceeds cannot be used to pay off creditors. There are exceptions though.
Beware of inaccurate reporting
There may be times when your credit report may have information wrongly entered. Your financial position may not be requiring you to file for bankruptcy, but your credit report says the other way round. It may be due to identity theft or wrongly entering your monetary movements in the credit report. If you find any discrepancies, report the same to the credit bureaus.
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