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What are the consequences of filing for bankruptcy?

September 12, 2012: 6:30 AM ET

I am contemplating filing for bankruptcy. I have already met with a lawyer who assures me I have nothing to worry about, as it's more common these days. But what are some of the short- and long-term effects of filing for bankruptcy? What are my chances of being hired in finance? Will it affect my ability to rent an apartment or buy a home? How long will it take to rebuild my credit? — Talia L.

It's true that bankruptcy carries less of a stigma than it once did. Still, approach bankruptcy with caution, says Claire Ann Resop, a bankruptcy lawyer based in Madison, Wis. and a former board member of the American Bankruptcy Institute. For one thing, a bankruptcy filing will appear on your credit record for 10 years if you've filed under Chapter 7 and seven years if you've filed under Chapter 13. Chapter 7 bankruptcy lets you eliminate most of your unsecured debt while Chapter 13 requires you to participate in a three- to five-year repayment plan.

You may be able to restore your credit score to healthy levels in as little as two years after filing for bankruptcy, according to Resop, but the filing may still cause you headaches. Even though it's against the law for landlords to disqualify tenants solely on the basis of a bankruptcy, they often treat bankruptcy as a red flag. Same thing with employers: The U.S. Bankruptcy Code prohibits employers from discriminating against jobseekers simply because they've filed for bankruptcy, but it may still be a factor — particularly for a job involving financial transactions, says Resop.

And in those first few years with a low credit score, you may not qualify for a home loan — at least not one with a reasonable interest rate. Your chances of qualifying for a better loan will increase once your credit has had a chance to heal.

For those reasons, Resop recommends seeking out alternatives to bankruptcy, whether it's borrowing money from relatives or trying to negotiate a debt settlement with your lenders. "But if your financial problems aren't fixable and you file for bankruptcy," she says, "you'll have to face the consequences."

— Marc Mewshaw

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