The Pros and Cons of Filing BankruptcyUpdated May 8, 2016 Bankruptcy
If you’re thinking about filing for bankruptcy, you know there’s a lot to consider. Your financial history, ability to get credit or purchase a home, and qualifications are huge factors in deciding if bankruptcy’s right for you — not to mention the time it takes to file and the stress of going through the court process. Bankruptcy’s often seen as a failure, but that’s a tough way of looking at it. There are many positives to filing, and in some cases, they can outweigh the negatives.
Pro: Bankruptcy Stops Collectors From Harassing You
Many people screen their mail or unplug the phone until after 9 p.m. in hopes of evading credits and collectors looking to receive payments on debt. Fortunately, the bankruptcy process protects you from collections agencies by creating an automatic stay — a legal injunction that stops any kinds of collections as soon as you file a bankruptcy petition. Automatic stays also put a pause on foreclosures, lawsuits, repossessions and wage garnishments. Having this legal protection ensures that a court can work through the bankruptcy process to resolve debt disputes and gives you piece of mind during a stressful financial time. Bankruptcy offers other protections, too, like discrimination from an employer; you can’t be fired for your financial or bankruptcy status, and if an employer attempts to do so, you have a legal backing in court.
Pro: Bankruptcy Clears Debt or Creates Repayment Plans
Obviously, one of the biggest perks to bankruptcy is that it helps you manage debt. Sometimes, that’s through waiving debt you can’t repay; other times, it’s by setting up a repayment plan that you can stick with. Chapter 7 and 13 are the most commonly used kinds bankruptcy. With Chapter 7, a court trustee will help you sell off items of value to repay your debts, and a court will clear whatever remains. Luckily, exemptions can help save items like your car, sell your business, home or property so that you can still be financially independent (many people fear losing everything, which is highly unlikely). Chapter 13 bankruptcy is common for people who make more than their state’s median income, and helps filers create repayment plans that work with their income and budget. Whichever route you take, bankruptcy’s end game is to help you get a fresh start — not punish you for your financial decisions or situations that landed you in debt, like hospital bills, accidents or job loss.
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Pro: Cleared Bankruptcy Debt is Really Gone
Unless you’re working through a repayment plan (under chapter 13 bankruptcy), debt that a court has waived is really, truly gone. That means you don’t have to repay a collections agency or lender after bankruptcy, though some people choose to make payments after they improve their financial situations as a good-faith gesture. With bankruptcy, you’ll be able to sleep at night knowing the financial burdens of debt are taken care of, instead of just being put on hold.
Con: Bankruptcy is Not a Free Process
The point of filing for bankruptcy is to help you manage debt that you can’t pay. And, it’s often a last resort for people who are struggling to make ends meet or are overwhelmed by their financial obligations. But, you should know that the court process isn’t free; in fact, it can be costly. Every person who files for bankruptcy will encounter a variety of court fees including administrative fees, document costs, fees for filing motions and more. On average, filing for bankruptcy can cost up to $300 or $400 depending on the type of bankruptcy, what happens in court and extra fees that vary by region. This doesn’t include the cost of an attorney or legal aid, which is recommended when navigating the court system. In some cases, the court may waive its fees and an attorney may offer pro bono or reduced-cost assistance depending on your ability to pay.
Con: It’s Possible To Lose Some Personal Belongings
Many people are fearful of bankruptcy because the common myth they’ll lose everything they own. While this is unusual, it’s important to fully understand how bankruptcy — and paying debts through bankruptcy — works. In some cases, such as chapter 7 bankruptcy, your personal belongings can be sold through a process called liquidation to help cover some debts. For example, a court trustee could sell of parcels of land or additional homes you own to cover pay your creditors. In many cases, courts sell off smaller items such as expensive clothing, accessories and luxury items while leaving your home or vehicle. Bankruptcy offers exemptions (protections for some property) so that you don’t have to start from square one. But, before entering bankruptcy court, you must recognize that you could lose personal property at the court’s discretion.
Con: Your Credit History Will Take a Dive
It almost goes without saying that bankruptcy will negatively impact your credit history. Many people are familiar with their credit score — a ranking used by financial lenders that gauges how good and reliable you are as a borrower. Credit scores can often dip by 100 to 250 points based on the amount of debt and your score prior to bankruptcy. This dent in your credit history will make it difficult to get loans, credit cards and other kinds of credit, and can last as long as 10 years. But, with good borrowing and spending habits, many people bounce back from bankruptcy sooner than that.
Every bankruptcy situation is different — there are just too many factors that go each judge’s bankruptcy decision. In some cases, there are more pros or more cons depending on your case. But overall, bankruptcy isn’t something to be entirely feared. It’s a tough process that can offer a pretty positive result: your financial freedom.