Declaring bankruptcy gives individuals or businesses that are unable to pay their debts a way to solve their financial difficulties. It can help them start rebuilding their credit and lives in a more positive and financially stable way.
In most cases, filing for bankruptcy seems like a scary and overwhelming task. However, it is often the right choice. The article below will discuss the pros and cons of bankruptcy, and whether it is the right option for you.
What are the Advantages to Filing for Bankruptcy?
Bankruptcy is designed to provide relief for those that are unable to pay their creditors back. Listed below are some of the advantages that bankruptcy can provide:
- Filing for bankruptcy will trigger an “automatic stay” — the automatic stay stops creditors from taking action to collect their debts, and stops creditors from repossessing property such as cars, and personal property. It also prevents creditors from calling you, suing you, or sending you letters.
- Filing for bankruptcy puts a stop to many evictions, foreclosures, wage garnishments and utility shutoffs.
- You may be able to discharge your obligation to repay some of your dischargeable debts.
- Your credit may improve. After filing for bankruptcy, your debt to income ratio will improve which is a factor in determining your credit worthiness.
- While a bankruptcy filing will remain on your record for 7-10 years, because debts can be discharged in bankruptcy, many debtors begin improving their credit rating after filing for bankruptcy.
- Most people that file for bankruptcy find relief knowing that they have a fresh start. While this may not seem like a huge advantage, filing for bankruptcy allows you to start fresh and be mentally freeing.
- If you don’t have credit cards, you can learn to live within your income and prevent future financial catastrophes.
- Debtors that file for bankruptcy will have access to financial counseling which will give you access to the tools to better balance your debt and manage your life.
- In a claim for bankruptcy you will be able to hold on to certain assets and manage your payments in smaller sums.
What are the Disadvantages of Filing for Bankruptcy?
Although bankruptcy has many advantages as stated in the section above, it also has repercussions that can negatively affect your lifestyle and your long term financial situation. Because of the list of disadvantages, you should think hard about whether filing for bankruptcy and whether it is the right thing for you to do. Issues like employers knowing of your bankruptcy can be a downside of filing for bankruptcy. Listed below are some of the most important and common disadvantages:
- 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 up to 7-10 years.
- Many credit card companies will automatically cancel your credit cards when you file for bankruptcy and this may lead to having difficulty getting new credit cards or lines of credit.
- Because bankruptcy is a public filing, a recent bankruptcy may hurt your ability to obtain a mortgage or loan for several years as it will be seen as a red flag to banks.
- Your tax refunds from federal, state or local governments may be in jeopardy or denied based on your bankruptcy.
- If you are seeking a job or housing, some employers or landlords may look unfavorably on a recent bankruptcy filing.
- If you are a member of a corporation, you may be precluded from being named a director for limited liability companies.
- After your bankruptcy, many debts, such as student loans, different types of tax debts, liens, support orders (including child support and alimony), federal and local taxes, or fines may be non-dischargeable.
- When filing 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 stopped from filing for bankruptcy again for some time.
- It can negatively impact a search for employment, because filing for bankruptcy is a public record and can be seen by potential employers.
- If you have any joint accounts, creditors can demand payment from the non-bankrupt debtor or any cosigners on those accounts.
- Filing for bankruptcy has a negative mental effect on some who might find it embarrassing.
While the last point might seem small, compared to the other disadvantages, bankruptcy often carries a stigma, which can affect your professional and personal life. However, the benefits of bankruptcy often outweigh the disadvantages.
Can Your Request for Bankruptcy Be Denied?
Petitions for personal bankruptcies are not denied often but under some circumstances they can be. Whether a bankruptcy is approved depends on how much income is made compared to how much debt you are in. A potential reason for denying a debtor’s bankruptcy is lying about how much certain assets cost or how much income the debtor made in the year. If the debtor attempts to hide financial assets and records, and this is discovered, their bankruptcy may be denied. The motivation behind filing for bankruptcy is to be completely honest about one’s financial status, and the necessity of creating a clean slate, financially.
Bankruptcies may also be denied for technical reasons, unrelated to the honesty of the debtor filing. For example, 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.
For the reasons expressed above, 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 it. If done correctly, a successfully filed bankruptcy can be a great decision to help get your life back on track.
Should I Contact a Bankruptcy Lawyer?
Whether bankruptcy is the right solution for 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 considering bankruptcy, you should consider discussing your options with an experienced bankruptcy attorney.
As with all court cases it is possible to represent yourself “pro se”; however, 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.
Because filing for bankruptcy is a complex legal claim, finding the right bankruptcy attorney is important. A bankruptcy attorney will help you decide whether or not to file for bankruptcy, and what type of bankruptcy you should file. Additionally, 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. That way, when you complete your bankruptcy, you will be on the right path to financial recovery.