As a result of the Great Recession, more and more parents and caregivers have debts weighing on their shoulders. Sometimes it’s a wise decision to use bankruptcy to alleviate debt concerns and get a fresh financial slate, but if you have children, you might want to think twice before filing for this form of debt relief.
What’s bankruptcy, anyway?
Bankruptcy is a legal way of resolving a debt conflict. When you file bankruptcy papers with a bankruptcy court, the judge assigned to the case attempts to determine whether you truly need to file bankruptcy—that is, he looks at your assets and income to see if your claim about being unable to pay creditors is true. People can file for different “chapters” of bankruptcy. Based on how you file, the judge might work out a payment plan with your creditors for you, or he might dismiss some of your debt altogether.
Although filing for bankruptcy sometimes is a good way to get back on your feet during a financial crisis, it is negative in that filing for bankruptcy shows up on your credit report for up to ten years. With a lowered credit score, it is more difficult for you to open new lines of credit. If you find creditors who will work with you, the interest assigned to your credit agreement likely will be higher than if you had never filed bankruptcy.
Bankruptcy and Your Kids
When a child is trying to get his financial feet wet, one way to do it is to get some backing from a parent or legal guardian. For example, you might pay the insurance on his car if he can work enough to make a car payment on his own. Alternately, many creditors have parents and caregivers cosign on loans for young adults. This happens because minors typically cannot enter contracts without the consent of an adult, and because cosigning gives the creditor another person from whom to seek payment in the event the child defaults.
Now, if you file bankruptcy and a new creditor sees from your credit report that you’ve filed, you suddenly do not appear as trustworthy to the creditor. That might mean you can’t get financing for something your child legitimately needs, such as his college education. It also can mean that you cannot cosign on any loans or financially-related your child wants to get in his own name. If you cannot cosign on your child’s agreements, it becomes hard for your child to establish both a credit and rental history. The lack of a credit and rental history can make future creditors wary of doing business with your child. It becomes much more likely that the creditor will require additional references or a different cosigner, which complicates financial issues that otherwise might have been simple.
Let’s not forget about the message bankruptcy sends, either. Bankruptcy tells your child you were not able to manage your money well enough to stay out of financial hot water. In some instances, this failure truly is due to circumstances beyond your control, but whether you just miscalculated or got backed into a corner, your child sees you getting out of contracts that are supposed to be solid. Your child might see bankruptcy as a get-out-of-money-jail-free card and be more willing to use it in the future because he has your example.
What to Do When Bankruptcy Is a Must
If you absolutely must file bankruptcy, another must is to sit your kids down and explain to them in layman’s terms what went wrong. They can’t learn from your mistakes if you don’t admit you’ve made them. Secondly, show your children the plan you’ve created to avoid another bankruptcy in the future so they know you do not intend to file again—present bankruptcy as a one-time deal and make them aware of your financial plans. Lastly, do everything you can to raise your credit score back up after you file. By working hard, you might put yourself into a position to work with creditors again in just two years.