Declaring bankruptcy allows individuals or businesses that are unable to pay their debts to resolve their financial difficulties and start rebuilding their credit.
Filing for bankruptcy has many advantages and disadvantages, depending on your situation. This article will discuss the pros and cons of filing for bankruptcy to help you decide if bankruptcy is right for you.
What are the Disadvantages of Filing for Bankruptcy?
Because filing for bankruptcy may affect your finances for many years, you should carefully weigh all of your options before filing. Some disadvantages are:
- If you are unable to exempt all of your personal property or real estate under the bankruptcy exemptions, some of your property may be seized by the bankruptcy court and sold to pay your creditors.
- Your bankruptcy will be noted on your credit report for 7-10 years.
- Many credit card companies will automatically cancel your credit cards when you file for bankruptcy. You will have difficulty getting new credit cards or lines of credit.
- A recent bankruptcy filing may hinder your ability to obtain a mortgage or loan for many years.
- Tax refunds from federal, state or local governments may be denied based on your bankruptcy.
- If you are looking for a job or housing, some employers or landlords may look unfavorably on a recent bankruptcy filing.
- You may be precluded from being named a director for limited liability companies.
- After your bankruptcy, some debts, such as student loans, many types of tax debts, liens, support orders (such as child support and alimony), federal and local taxes or fines may be non-dischargeable.
- If you file for Chapter 7 bankruptcy, you will need to wait if you want to file again for at least 8 years. Therefore, if more financial difficulties pile up, you will be precluded from filing for bankruptcy again for some time.
- It can drive up your insurance premiums.
- It can impact a search for employment, since some potential employers run credit checks on candidates for employment.
- Bankruptcy can be embarrassing.
While the last point might seem trivial compared to the other disadvantages, bankruptcy carries a serious stigma, and personal bankruptcy more so. However, it’s important to not let yourself avoid the benefits of bankruptcy (as seen below) just so you can also avoid embarrassment.
What are the Advantages to Filing for Bankruptcy?
Despite its disadvantages, in many cases, filing for bankruptcy is the correct course of action. The advantages of filing for bankruptcy are:
- Filing for bankruptcy will trigger the automatic stay, preventing creditors from taking action to collect their debts, prevent creditors from repossessing property such as cars, including calling you, suing you, or sending you letters. This also puts a stop to many evictions, foreclosures, wage garnishments and utility shutoffs.
- You may be able to discharge your obligation to repay any of your dischargeable debts.
- By using the bankruptcy exemptions, many debtors can go through the bankruptcy process without losing any of their property.
- While a bankruptcy filing will remain on your record for 7-10 years, because many debts can be discharged in bankruptcy, many debtors begin improving their credit rating after filing for bankruptcy.
- Without credit cards, you can learn to live within your income and prevent future financial catastrophes.
- Debtors declaring personal bankruptcy are required to take credit counseling. Therefore, you’ll have education to guide you as you rebuild your credit and learn new financial habits.
Can Your Request for Bankruptcy Be Denied?
Petitions for personal bankruptcies are not denied often, but it is a possibility. One potential reason for denying a debtor’s bankruptcy is dishonesty. If the debtor tried to hide financial assets and records, and this is discovered, their bankruptcy may be denied. The notion behind bankruptcy is total honesty about one’s financial status, and the necessity of creating a clean slate, financially.
Bankruptcies may also be denied for technical reasons. For instance, if paperwork work is not timely or is otherwise filed incorrectly, or other conditions for filing a bankruptcy are not met, the bankruptcy petition may be thrown out.
It is also possible for the court to convert the debtor’s type, or “Chapter,” or bankruptcy, to one that is deemed more suitable to the debtor’s circumstances.
It is best to be completely honest about your financial situation, and handle (or have your lawyer) handle all technical aspects of the proceedings correctly in order to make a bankruptcy petition worth your while.
Should You Contact a Bankruptcy Lawyer?
Whether bankruptcy is the right solution to your financial problems will depend on your situation, the type of debts you have, and how much property you need to protect. If you are contemplating bankruptcy, you should consider discussing your options with an experienced bankruptcy attorney.
While it is possible to handle a bankruptcy pro se (representing yourself), the majority of people who file bankruptcy in the United States do so with the assistance of an attorney. There are many different types of bankruptcies, and rules that go along with each one, and a lawyer experienced in bankruptcy law can be very valuable.
A bankruptcy attorney can help you decide whether or not to file for bankruptcy, and what type of bankruptcy you should file. If you decide to file, an attorney can help ensure that your property is protected, all of your dischargeable debts are discharged, and your creditors do not violate your rights, so that when you complete your bankruptcy, you will be on the right road to financial recovery.