Most people believe that once you file for protection in bankruptcy your credit is destroyed and you will not be able to borrow money while the bankruptcy is on your credit report. Nothing could be further from the truth. While it is true that a Chapter 7 bankruptcy is reported for ten years, the negative effect of the bankruptcy is not that severe and diminishes over time. The actual effect on your credit score depends upon you credit report when you file the bankruptcy. If you have no delinquencies, no judgments, or other bad marks, then you credit score will drop when you file for bankruptcy. If you have delinquencies, judgments and other negative marks then the bankruptcy might actually increase your credit score because the bankruptcy effectively zeroes your debt out. The account will still appear on your credit report, however it will be reflected as discharged.
A bankruptcy will prevent you from getting a home loan for at least one year under some conditions. Other lenders such as credit cars and vehicle lenders have no minimum waiting period. In fact there are lenders who solicit individuals who just got a discharge in bankruptcy. These offers will not be for 2% car loans and low interest credit cards, but they will deal with you.
I do not take the decision to file bankruptcy lightly, and I know my clients do not either. But at some point the analysis has to look at the numbers and the cost/benefit analysis. My rule of thumb is if you can not pay off substantially all your debt in three years, then bankruptcy probably makes economic sense. Another way to look at it is how much is my credit score worth in dollars and cents. How much will you and your family sacrifice to pay down your debt? Would you be better off if you banked that money and filed a bankruptcy.
