5 reasons to think twice before declaring bankruptcy

Hand with pen filling out bankruptcy petition

Bankruptcy is like the divorce of personal finance. The idea is to give you a fresh start by erasing your debt.

Some people think it’s the easiest way to escape debt, but it could be years before that fresh start comes.

In the meantime, you’re going to face some tough consequences.

Your credit is going to take a big hit, and everything from a new car to your insurance is going to cost you a lot more.

Bankruptcy should be an absolute last resort, and here are 5 reasons to think hard before you consider filing:

Reason 1: It will trash your credit ... for years.

Filing for protection from your creditors can drop your FICO score by 130 to 240 points.

It will remain on your credit report for up to 10 years and even after that can have an impact on your credit sore.

Many credit applications specifically ask whether you have ever filed for bankruptcy.

And it's a pretty serious thing, the financial equivalent of a murder conviction. Many lenders aren’t going to want anything to do with you.

It tells them that you can’t manage credit and that you’d rather run and hide than pay the money you owe.

You'll have a very hard time borrowing any kind of money for years. If you can get a loan, you’re going to pay through the nose with a very high interest rate.

If you have to buy a new car or house within the next seven years, you could end up paying twice the interest rate of everyone else. Sometimes more.

A 48-month, new-car loan is going for around 4% right now. If you’ve got a bankruptcy on your record, you could end up paying 10% or more.

With a $15,000 loan at the 4% rate, you'd pay $1,257 in interest over the life of the loan. At 10%, you’ll pay $3,261.

Reason 2: You could lose some of your possessions.

There are two types of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 can make credit card debt, unsecured loans and medical bills simply vanish.

But your property can be seized to repay as much of those debts as possible. Your home might be protected, but anything else (your car, your boat, that nice new television) could be sold off.

State laws dictate what can and can't be taken away. If you don't have much, your case could be classified as "no asset."

It's not pretty, and it's also the worst for your credit. Chapter 7 pegs you as the ultimate financial failure.

It's one thing if you've started up a business and have to go this route, but if you've gone this far on a personal level, you’ve likely made some serious financial mistakes.

With Chapter 13, your creditors agree to write off part of what you owe and you agree to repay the rest over the next three to five years.

That's probably not the fresh start you had hoped for.

Reason 3: Everyone is going to know.

When you file, it becomes part of the public record. It can be shameful and embarrassing.

Not that there's going to be a sign in your front yard, but people can and will find out. In some towns, newspapers will even run your name in the court filings.

Your friends, family, coworkers and employer are going to find out.

The single biggest cause of serious financial trouble is unpaid — and unpayable — medical bills. But the newspaper won't list a reason.

All anyone is going to know is that you didn't pay your bills and didn't live up to your financial obligations.

You can try to keep your financial life private, but going to court will open the doors for everyone to see. And what they’re going to see is failure.

Reason 4: It may be too late anyway.

Many people wait too long before seeking help. There comes a point at which the filing doesn't do much good.

If your car has been repossessed, you may be able to get it back and include it in a Chapter 13 payment plan. But you’ll have to pay a lot of money in the process.

If you’ve already reached the point of garnishments and tax liens and have started depleting your retirement savings to pay creditors, it may be too late.

Bankruptcy is about protecting your property from creditors, and once it has been taken, it is hard to get it back.

At that point, the court can't offer you much protection because the damage has already been done. If you file anyway, you’ll be hit with the double whammy of what you’ve already lost plus the consequences outlined here.

Reason 5: It could affect your employment.

Many potential employers now check credit reports. Some specifically ask on applications whether you've declared bankruptcy.

Federal law says you can't be discriminated against or fired because of that.

But it's hard to prove you've been wronged. Employers won't come right out and say it. They just wont' hire you — and nothing says they have to provide a reason.

Unless they're actually willing to sit down and listen to your sad, compelling story, they're just going to see a Chapter 7 or 13 filing as a big black mark on your application.

Finally, not that you’d ever want to do it again, but if you filed when you don’t really have to, you might be burning up your only chance.

You can’t file again for six years. So if you get into real problems, like the very real threat of involvency due to medical debt, you won’t be able to file for protection.

Remember, it’s a last resort.