The biggest mistake that you could ever make when handling your finances is to ignore your loans and allow it to pile up. Their interests would keep on growing, which in turn affects your debt-to-income ratio. These debts keep on increasing until you finally reach a seemingly insurmountable problem. Once you reach this situation, you would have the option to either fix your bad credit scores or file for bankruptcy.
Filing for bankruptcy might seem like a good idea. It would cancel out all your outstanding debts and give you the opportunity to start anew. However, it is not a foolproof way to address your finances. It would have a negative impact on your credit scores, hence affecting your possible financial transactions. If you want to know more about the downsides of bankruptcy, you should read this article and understand its important points.
Automatic deductions on your credit score
Any person who files for bankruptcy would automatically earn a deduction on their credit scores. The standard deduction is 220 points, which would actually make it hard for you to rebuild your credit. If you do not have enough knowledge about addressing bad credit scores, you should think twice before filing for bankruptcy. It would be very hard for you to recover if you are clueless about the point systems in credit cards.
However, you could also ask for help once this happens to you. Contact a financial advisor or a credit professional. They would help you construct a definite program that you should follow in order to improve your credit scores and achieve satisfactory financial records.
Bad records on your financial history
Aside from a direct deduction, you would also experience other problems after bankruptcy. It would actually remain on your financial records, hence breaking your image as a credible borrower or buyer. This usually remains on your history for about seven years, together with all your unpaid debts. Keep in mind that the cancelling out of your debts does not mean that you would instantly acquire a clean financial record. The record of your debts still stays for also seven years after you have filed for bankruptcy.
If you are planning to buy a home or acquire mortgages and loans, make sure to review the policies of the lending company you chose. Look at the amount of time they give to borrowers in order to rebuild their credit before gaining a mortgage approval. Search for a company that allows a borrower to recover financially for about two years instead of waiting for the entire seven years to pass by.
Detrimental effects on financial transactions
Now that you have known the effects of bankruptcy in your finances, it would be easy to understand how it affects your transactions with other people. Lenders would not allow you to borrow money from them unless you have acquired a satisfactory credit score. If you were unable to fix your scores after the deduction, it would be hard for you to gain mortgage approvals or any kind of loan.
The downsides of declaring bankruptcy proves how it should serve as your last option. You should only opt to declare bankruptcy only when you enter a serious financial situation. Do not forget that you could always ask for help from credit experts or financial advisers once the situation gets too tough for you to handle.