In the U.S., debt is a serious financial issue. According to Debt.org, factoring in mortgages, the average debt in the U.S. is $101,915 per household.
When debt gets out of control, it’s common knowledge that bankruptcy is an option. However, it might not be as great of an option as it may seem.
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Rachel Cruze, personal finance expert and frequent co-host of “The Ramsey Show,” cautions you to pump the brakes if you think bankruptcy will definitely be an easy fix for your problems. In a recent episode, a caller explained that he was thinking about declaring bankruptcy after racking up $85,000 in credit card debt, but Cruze wasn’t keen on the idea.
Here are three reasons why you shouldn’t declare bankruptcy unless you have to.
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1. It Follows You
Americans who find themselves in massive amounts of debt can turn to bankruptcy for relief. Bankruptcy stops creditors from collecting and eliminates or restructures the debt to give the debtor a fresh start. As Cruze acknowledged, “It sounds easy just to wipe it clean and start over.”
However, the issue doesn’t just disappear. Declaring bankruptcy means it will be on your credit report for years.
Chapter 7 bankruptcy, in which a trustee collects and sells your assets to pay your debt, may remain on your credit report for up to 10 years. Chapter 13 bankruptcy, which allows you to structure a repayment plan, stays on your credit report for up to seven years.
Even if you completely pay off your debt after filing for bankruptcy, the stain on your credit report will have lasting negative effects. Your credit score will drop by 100 to 200 points, so you’ll pay much higher rates for new credit cards, loans and mortgages. Your poor credit report may also limit your housing and employment opportunities.
While it can be challenging to get out of debt, doing so without bankruptcy allows you to maintain a cleaner credit report and enjoy the benefits that come with it.
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2. The Root of the Problem Doesn’t Change
Cruze referred to bankruptcy as an “easy button.” While it is a legal process that’s designed to relieve Americans in debt, there’s no guarantee that it will change how you think and act.
Serious debt often accumulates because someone has made numerous poor financial decisions over an extended period, and studies have shown that 16% of all bankruptcy cases are from repeat filers.