About this video
This video reviews Chapter 7 (liquidation) and Chapter 13 (restructuring) bankruptcy and explains that some debts, like child support and most federal student loans, cannot be cancelled. It then focuses on the downsides: a bankruptcy stays on your credit report for years and can make loans, renting, deposits and some jobs harder to get.
You'll be able to
- describe the difference between Chapter 7 and Chapter 13 bankruptcy.
- name debts that bankruptcy usually does not cancel.
- explain how a bankruptcy on a credit report affects borrowing, renting and employment.
Key words
- Chapter 7 bankruptcy
- A bankruptcy where assets can be sold off (liquidated) to pay creditors, giving a complete financial reboot.
- Chapter 13 bankruptcy
- A bankruptcy for people with regular income that restructures debts into a new payment plan so they can keep some assets.
- Credit report
- A record of your borrowing history that lenders, landlords and some employers check.
- Credit rating
- A measure of how trustworthy you look as a borrower, based on your credit history.
- Deposit
- Money paid up front, for example to a landlord or utility, as protection in case you don't pay.
Transcript
- So in other videos we talk about the general idea of chapter seven or chapter 13 bankruptcy. Just as a little bit of a refresher, chapter seven things are kind of getting liquidated and it's a complete reboot, and that might be simpler, but they can go after your assets.
Chapter 13, and this is more where you do have a regular income and you probably have some assets you want to preserve. That's more of a restructuring. They'll talk to all the people that you owe money to and say, okay, can we come up with another payment plan?
Et cetera, et cetera. Now, neither of these things are easy things and they won't solve all of your problems. In fact, a lot of types of loans you can't even touch with these types of things. They're not going to get canceled. Things like alimony, child support, federal student loans in most cases.
But what we wanna focus on this video is let's say you are able to go through that process, either chapter seven or chapter 13, what are some of the downsides here? Well, we've learned in those other videos, chapter seven affects your credit rating for 10 years, chapter 13 seven years, and what that means is when you go for loans, they're going to see it on your credit report.
And so in a lot of cases, you won't even get a loan or if you do get the loan, the loan is going to come at a much higher interest rate. Similarly, when you go try to rent an apartment, your landlord or future landlord is likely to do a credit report on you, and if they see that, they might not look at you so favorably compared to other people who don't have the bankruptcy, and frankly, who have a better credit rating.
People might ask for larger deposits, including utility companies, because they're like, well, I don't know. If this person runs up a bill of a thousand dollars electricity, maybe they won't pay it. And even if you apply for home loans to buy a house, as I said, borrowing, you're more likely to get rejected, and once again, you might have higher interest rates.
Last but not least, employment can be tough, especially if there are jobs that involve with things like finance, government work, jobs that involve handling money, or sensitive information. They might look at your credit report and see that bankruptcy is like, oh, I don't know.
I don't know if this is going to be prudent to have this person who needed help with their finances doing this very sensitive thing. So it is a tool, it's out there, but be be aware of the downsides. There are reasons you might wanna do it. It can get you out of a very hard situation and so you should look at it, but be aware of what the downsides might be.
Video © Khan Academy, used under CC BY-NC-SA. Watch on Khan Academy. Puzzicle is not affiliated with Khan Academy.