The aftershocks of filing an early bankruptcy

December 11th 2012

The fiscal and domestic financial policies of the Republican Bush administration paired with the expensive war of attrition on terror and the housing bubble culminated in the greatest economic downturn in 85 years, the financial meltdown of 2008. Millions of Americans were either downsized, people lost their homes to foreclosures and credit conditions were choked to a point that the average American household debt load far exceeded the median income adding to the woes.

The Obama administration led the economic recovery process but the progress has not been adequate enough to conclusively lower the national debt and unemployment. There is still a large section of the population overburdened by debt and at least 8 to 14 percent unemployment. As a measure of relief, individuals usually resort to filing bankruptcy in order to find some breathing space and start over again. Although bankruptcy is a viable option, the aftermath can be somewhat lethal for your financial future. Here is why:

It does nothing for student loan debt

One of the primary reasons for young working professionals in their 20s and 30s is the growing burden of student loan debt. A recent survey conducted by the Pew Research Center reveled that almost one in every five average American families is carrying some sort of student loan debt. Fresh graduates have their work cut out for them as well given the tough economic situation prevailing in the country. Underemployment and unemployment has significantly reduced the ability of such fresh graduates to repay the loan on time. High interest rates and hard repayment terms does not make the process any easier.

Assuming that student loan debts (either Federal or private) are in fact one of the major underlying causes of your financial distress, bankruptcy will not be able to provide you with any kind of relief. There is no statute of limitations as far as collecting on student loan debt is concerned, it is almost impossible to have it discharged through bankruptcy and moreover the government has the power to offset your social security, disability and retirement benefits as a part of collecting on your federal student loan debt .

So basically, if you are looking to get out of student loan debt, bankruptcy is not the option you should be exploring. It is not going to root out the problem but is going to stay on your record for 7 to 10 years and trash your credit to boot.

It could hurt you socially

Filing for bankruptcy in your 20s is going to have far reaching effects since such a big move can hardly be ignored by lenders and potential employers. You will have a pretty tough time finding new credit with good rates. On a more serious note, applying for a mortgage and buying a new home will probably be delayed by a pretty long while since lenders usually decline to do business with borrowers who have filed for bankruptcy in the recent past.

The bankruptcy remark is going to disappear from your credit report in 7 to 10 years but the effects of that one single fact is quite derogatory. Since filing bankruptcy will trash your credit, you will have a very hard time finding new credit at affordable rates and an even tougher time rebuilding your credit little by little.

Early bankruptcy also hurts your future job prospects. Most employers usually do not take a peek at your credit report when you apply for a job but since you give them the right to run a background check, they have the right to do so. In case you are applying for a job which involves handling money, you might be rejected for the position if you have a bankruptcy on record. Even certain employers involved in non-monetary businesses like insurance and financial law also refuse to employ people with bankruptcy in their records.

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