Filing for bankruptcy is not to be undertaken lightly, but it can provide a fresh start to both individuals and businesses who are in over their heads financially. By filing bankruptcy, they can get relief for their current financial distress, and work toward a healthier financial future.
If you do file for bankruptcy it is important to be aware of the pros and cons of doing so, and of the impact it will have on your life and your future. It will depend partially on your situation. Whether you file as an individual or business, and the nature and extent of your debts are some examples of important details that will affect not only whether you should file for bankruptcy, but what type of bankruptcy you should file for.
However, for purposes of this article, there are still major pros and cons which apply to the majority of people who declare bankruptcy, and knowing these can help you decide if bankruptcy is the right path for you.
When you are unable to pay off your debts, bankruptcy may be the answer. Some of the pros of filing for bankruptcy are:
The First Pro of Bankruptcy
The Automatic Stay: When you file for bankruptcy, it puts into place what is known as the “automatic stay.” The automatic stay prevents any of your current creditors from continuing to attempt to collect on the debts you owe them.
This includes any forms of contact. As soon as the automatic stay is in place, your creditors can no longer call you, or send threatening letters, or use any other means of contact trying to collect on debts. The automatic stay will continue to protect you from creditors throughout your bankruptcy, as you attempt to resolve your financial issues.
An automatic stay may also prevent your home from being foreclosed on during the bankruptcy process, and it may also halt current court cases against you (in which someone is trying to collect money from you).
The Second Pro of Bankruptcy
Discharge Your Debts: This is the main reason people file for bankruptcy. When debts get too out of control, there is little hope of improving financial health. Many types of debts, however, can be discharged, allowing the debtor to start over and start making better financial decisions.
Discharging a debt means the debt is totally wiped out, and you no longer have the responsibility of paying it. There are, unfortunately, some types of debts that cannot be discharged (discussed in the “Cons” section). However, many types of debt can, including credit card and medical debt.
The Third Pro of Bankruptcy
Begin Rebuilding Your Credit: initially, bankruptcy will have a negative impact on your credit score. Once the bankruptcy is final, your credit score will take a hit, and the record of the bankruptcy will show up on your credit report for 7-10 years, depending on the type of bankruptcy you file.
However, once your debts are cleared and you start over financially, improving your credit over time is possible. Without the debts weighing on you, you can start paying your bills on time, which will eventually improve your credit score.
Bankruptcy can be beneficial under the right circumstances, but it is important to understand the disadvantages, as well:
The First Con of Bankruptcy
Your Credit Report: as mentioned above, although you can eventually rebuild your credit following a bankruptcy, you will, at first, notice a decline in your credit score. Also, the bankruptcy is noted on your credit report for 7-10 years.
In any situation where your credit report is pulled (for example, you try to take out a loan), lenders and others will be able to see that you declared bankruptcy, and make judgments accordingly.
You will probably lose any credit cards you have at the time of filing for bankruptcy. You are also very unlikely to obtain a home mortgage, or any other significant line of credit.
The Second Con of Bankruptcy
Your Property May be Confiscated: During the bankruptcy process, some of your property may be taken by the court and sold in an effort to pay off your creditors. However, with the help of a lawyer, most or all of your property can be protected in bankruptcy through the use of the bankruptcy exemptions. By using the bankruptcy exemptions, it is common for people who file for bankruptcy to keep all of their property.
The Third Con of Bankruptcy
Some Obligations Are Nondischargeable: This is very important to realize. As discussed above, while many types of debts can be discharged in a bankruptcy, there are some significant types that cannot. Many types of tax debts and legal fines are non-dischargeable. Court-ordered support payments such as child support and alimony are not dischargeable. Student loans, which may be very sizeable debts, are almost never dischargeable.
It is also important to note that the bankruptcy applies only to your own liability for debts. If you hold the debt jointly with someone else, the debt will remain, and all responsibility for the debt will go to your joint debtor.
Also, liens, which attach to your property, cannot be discharged through bankruptcy. However, through the assistance of an attorney, some liens may be avoided during the bankruptcy process by filing motions with the court.
The Fourth Con of Bankruptcy
Limits to Filing for Bankruptcy: Once you have filed for bankruptcy, you cannot file again for about six years. Thus, if additional debts come up after your bankruptcy, you might be left without similar recourse.
Even a seemingly straightforward bankruptcy for an individual can present complications. Working with an experienced bankruptcy lawyer can greatly enhance your chances for completing your bankruptcy successfully.