Bankruptcy Can Hurt for Decades

Presidential candidate and Illinois Senator Barack Obama proposed changes to bankruptcy laws on Tuesday to make it easier for certain Americans to wipe away debt, but a new study reinforces the view that filing for bankruptcy may not be worth it.

Rules enacted in 2005 made it harder and more costly for Americans to file for Chapter 7, in which assets are liquidated and given to creditors, or Chapter 13, which structures a repayment plan for certain debts over a term up to five years. (Debts outside of the plan would not have to be repaid.)

However, Obama took note of the many Americans dealing with high costs and enormous debt burdens, saying that military families and those struggling with medical bills -- which cause about half of all bankruptcies -- should get a pass.

Whether bankruptcy laws get a major overhaul or not, those considering such a move should be aware of the consequences. Research conducted by professors at Ohio State University and the University of Maine found that financial damage caused by filing for Chapter 11 can be widespread and last for decades.

Overall, it can take over 20 years for bankruptcy filers to reach the same financial status as those with similar social and economic backgrounds who did not file for bankruptcy. It took more than a decade for a bankruptcy filer to catch up to peers in terms of savings, income and home ownership, according to the study. It took more than a quarter of a century to reach the same level of net worth.