The misconception about bankruptcy is that it's a quick fix for finances. Your clients may think that filing for this procedure will just erase all of their debts and that they can wipe their hands clean of the situation. But in fact, bankruptcy is a last-ditch effort and can be one of the worst things that can happen to someone's finances. If your clients feel like this is their only alternative, you should talk with them about the dangers of the situation. Learning a bit more about the subject can shed some light on whether this situation can truly help them. Here are a few things you should explain to your clients about bankruptcy:
What is bankruptcy?
This process takes effect when consumers cannot pay back their debts for whatever reason, and they will be eliminated and protected under federal bankruptcy court. There are several types of bankruptcy fillings, but the most common ones are liquidation (Chapter 7) and reorganization (Chapter 13). Under Chapter 7, consumers will need to sell their assets in order to pay for their debts. A trustee will be assigned to the case to make sure everything is under control. Chapter 13 allows consumers to pay back their loans thanks to a repayment plan, but there will be some stricter rules involved and they will be under the watchful eye of the trustee. If a consumer comes to you or asks other credit union representatives for help, explain to them their options.
Stays on your credit report
Once they have declared bankruptcy, it can be hard to qualify for loans and new lines of credit. Consumers can get a little wiggle room if they have a low credit score, but if a bankruptcy filing is on their report, they could be in purgatory for a while. This blemish can stay on a consumer's credit report for a number of years. For instance, Chapter 7 could be on there for 10 years. This can impact your client's chances of getting a mortgage or obtaining a new loan for a car or motorcycle.
Credit score drops
A score is probably one of the most important components to getting approved for a loan. Lenders will check this out in order to determine what level of risk a consumer will pose for the loan they want. Even missing one credit card payment could cause a credit score to drop. Bankruptcy can have major effects on a credit score, as it is one of the worst things that can happen to someone's finances. Repairing a score takes time, even for a small mishap like forgetting a payment, so your clients and other consumers have their work cut out for them if they have filed for bankruptcy.
Limited use of assets and cash
Whether they have filed for Chapter 7 or 13, potential borrowers should be aware that they won't be making any major purchases for awhile. Under Chapter 7 they're allowed to protect a few assets, but they should be ready to part with their belongings. With Chapter 13, clients need to pay their creditors back either on a three-year or five-year plan. This means that their money will be tied up in order to meet this obligation. This can have impacts on other areas of their finances, such as investing in a home purchase.
Helpful tips
Bankruptcy can be troublesome for anyone, but people can work their way back from it. It could take some time, so people shouldn't think there is a magical fix to get this done. They can improve their situation by whittling down their debt, making bill payments on time, refinancing accounts with the hope of getting a lower interest rate or seeing if they can get a secured card to help limit spending.