What is a consequence of declaring bankruptcy?

Declaring bankruptcy is a significant financial decision that typically leads to a reduction in credit score. When someone files for bankruptcy, it signals to lenders that they are unable to meet their debt obligations, which is viewed as a major risk factor. As a result, credit reporting agencies will reflect this negative event on the individual's credit report for several years—usually up to ten years for a Chapter 7 bankruptcy. This reduced credit score can make it more challenging to secure new credit or loans in the future, and if approved, the terms will likely come with higher interest rates due to the perceived risk of lending to someone with a bankruptcy on their record.

In contrast, while the idea of eliminating all debts may sound appealing, not all debts are discharged in bankruptcy. Student loans, certain taxes, and child support obligations usually remain intact. Automatic approval for new loans after the bankruptcy process is unlikely; lenders generally impose strict assessment criteria on applicants with a bankruptcy history. Access to government grants does not directly derive from declaring bankruptcy, as grants are typically provided based on need or eligibility rather than financial status history. Therefore, the reduction in credit score is the only choice that accurately captures a direct consequence of declaring bankruptcy.