If you find that your financial troubles are serious enough to consider filing bankruptcy, you're not alone. United States Bankruptcy courts report a combined total of more than 903,000 Chapter 7 and Chapter 13 cases between March 31, 2014 and March 31, 2015. Sometimes the benefits of bankruptcy outweigh the disadvantages. However, filing bankruptcy isn't a magic solution. It has long-term financial consequences and you might lose some of your personal assets.
Bankruptcy laws are complicated. Seek advice from an attorney before deciding whether bankruptcy is the best option for your specific circumstance. Check your local bar association for free advice and a list of bankruptcy attorneys in your area.
Pros of Filing Bankruptcy
Get Immediate Debt Relief
When your debt has piled up to the extent that you can no longer make timely payments, bankruptcy might seem like the only viable solution. Depending on your financial situation, it may be impossible to ever pay off your debt without bankruptcy relief. A Chapter 7 bankruptcy forgives all your unsecured debt, while a Chapter 13 bankruptcy allows you to reorganize some or all of your debt and make a payment plan for several years.
Stop Collection Activity and Garnishments
Calls and letters from debt collectors only add to the stress you experience when you're struggling financially. Wage garnishment can make it impossible to keep up with your living expenses. Once you file bankruptcy, an automatic stay immediately goes into place, which means that creditors must immediately cease all collection and garnishment activity.
Avoid Losing Your Home or Vehicle
If you're in danger of losing your home to foreclosure, or having your vehicle repossessed, bankruptcy may be the right solution for you. A Chapter 13 bankruptcy typically allows you to keep your home and car, and fold the arrears into the payment plan. For instance, if you are past due $5,000 on your mortgage, your Chapter 13 repayment plan may allow you to pay that amount back over the course of five years, which allows you to maintain a current payment status on your mortgage and avoid foreclosure. During Chapter 13, it's important to make all of your payments in a timely manner to keep your home and cars.
Certain limitations apply to your home and vehicle in a Chapter 13. Consult with your attorney to determine how the bankruptcy law applies to your individual situation.
Cons of Filing Bankruptcy
Experience Difficulty Getting Credit
Bankruptcy stays on your credit report for up to 10 years. During that time, you may have difficulty getting lines of credit, auto loans or mortgages. Some landlords may refuse to rent to you based on your financial history. People who file Chapter 7 bankruptcy may have access to automobile loans and credit cards, but at much higher interest rates. The impact of higher interest rates can cost you thousands of dollars in the years following your bankruptcy.
However, by the time you file bankruptcy you may already have a low credit score, judgments, late payments and even evictions on your credit report. The amount of negative impact bankruptcy has on your credit report depends on how bad your credit was before filing.
Some Debt Can't be Discharged in Bankruptcy
If the majority of your debt is due to taxes or student loans, bankruptcy might not be the best option. Student loan debt is usually not forgiven in bankruptcy. In very limited circumstances, such as extreme poverty, some courts may allow your student loans to be discharged in a Chapter 7 bankruptcy. However, most courts do not allow this. If you file a Chapter 13, you may be allowed to pay reduced payments on your student loans, but after the bankruptcy is discharged -- typically in three to five years -- you will still owe the balance left on the loans.
You May Lose Assets Due to Bankruptcy
Bankruptcy laws allow you to keep some of your possessions, but you may lose others. When you file a Chapter 7, you must disclose all your personal property and real estate. Federal and state laws allow for exemptions, but if your property exceeds the value of those exemptions, the trustee may seize and sell your assets. Proceeds go to your creditors, who each get a portion. For instance, if your state allows a $5,000 exemption for your vehicle, but your car is worth $10,000 and you own it outright, the trustee may insist that you forfeit the car. Other property, such as boats, recreational vehicles, furs, expensive jewelry, etc. may also be subject to seizure.
- American Bar Association: Advantages of Filing for Bankruptcy
- American Bar Association: What Does a Chapter 13 Bankruptcy Case Involve?
- American Bar Association: Can I Save My Home and Other Assets by Filing Chapter 13?
- American Bar Association: What are the Disadvantages of Bankruptcy?
- United States Courts: Bankruptcy Filings March 31, 2015
- NOLO: Exemptions in Chapter 7 Bankruptcy