“Should I File for Bankruptcy?” The Pros and Cons of Declaring Bankruptcy

“Should I File for Bankruptcy?” The Pros and Cons of Declaring Bankruptcy

 

Filing for bankruptcy can often feel like a significant step with questionable consequences. Filers find considerable debt relief, but they also face new challenges in rebuilding their credit and securing future loans. If you are currently on the fence about whether you should declare bankruptcy or not, you are in the right place. To answer the question of “should I file for bankruptcy,” you need to understand the advantages and disadvantages of either choice.

 

Advantages of Filing for Bankruptcy

You get an automatic stay against creditors

As soon as you file for bankruptcy, the court will automatically issue a stay against any debt collection activity. This action does not end or cancel your debt, but it suspends any ongoing debt collection proceedings until your bankruptcy case is handled or the stay is lifted. This means that the following will be suspended:

  • Wage garnishments
  • Lawsuits on the debts
  • Calls or letters from debt collectors
  • Property repossession
  • Home mortgage foreclosures

 

If a collector tries to collect from you after the court has issued a stay, your lawyer can bring a contempt of court action against them.

Keep in mind, however, that the automatic stay does not stop any of the following:

  • Government tax audits
  • Criminal proceedings
  • Establishment of paternity
  • Child support or alimony collection and establishment
  • Co-debtors or co-signers

 

Dischargeable debts

Depending on the bankruptcy Chapter you are filing for, you may be able to cancel or discharge your responsibility to repay your debts. An example of dischargeable debt can be medical, utility bills, credit card debt, and personal loans, which can typically be eliminated by bankruptcy.

 

You may be allowed to retain ownership of your property after bankruptcy

One of the many reasons people decide to file for bankruptcy is the possibility of exempting some of their assets. This means they cannot be seized in the bankruptcy case. These exemptions play a key role in filing for Chapter 7 or Chapter 13. Some exemptions pertain to certain assets, such as a wedding ring or a motor vehicle, while others may apply to a type of property you own. Some exemptions offer protection up to a certain dollar amount of a particular asset or its entire value.

 

Credit Score

It is important to know that a bankruptcy filing will remain on your credit report for about 7 to 10 years, but some debtors start improving their credit scores after filing for bankruptcy. This happens because after your dischargeable debts are canceled, you can move forward with a clean slate and rebuild your credit.

 

Disadvantages of Filing for Bankruptcy

Loss of property and real estate

Not all personal property and real estate can fall into the exemptions category, and the bankruptcy court may seize some of your property and sell it in order to pay your creditors.

 

Loss of credit cards

If you are wondering, “should I file for bankruptcy if I want to keep my credit cards,” you should reconsider. As soon as you file for bankruptcy, many credit card companies will automatically cancel any cards that you hold with them. You may receive a number of offers to apply for “secured” credit cards once you file, but you need to be careful with them. While secured credit cards can help rebuild your credit, they also have high-interest rates and require annual fees. Keep that in mind.

 

An immediate impact on your credit score

As mentioned earlier, if you file for Chapter 7, the bankruptcy will stay on your credit report for 10 years, while Chapter 13 bankruptcy will remain for 7 years.

 

It can be difficult to get a loan or obtain a mortgage

If you want to take out a loan or a mortgage, you will likely need to wait or take extra steps, depending on your specific circumstances.

 

Non-dischargeable debts

While there are dischargeable debts you will no longer be responsible for paying — there are still those from which you cannot free yourself. These include student loans, child support and alimony, criminal restitution and fines, and any debt acquired through fraudulent activity.

 

Denial of tax refunds

Federal, state, and local tax refunds can be denied if you have declared bankruptcy.

 

Housing and job hunting

There is still a certain stigma surrounding people who have filed for bankruptcy, and you can experience that when you are looking to get a house or trying to find a job. Potential landlords and employers can often ask about recent bankruptcies, which can negatively affect your chances of moving forward.

 

So, Should I file for Bankruptcy?

Now that you know the main pros and cons of filing for bankruptcy, it is time to make up your mind. If your main goal is to start fresh by discharging as many of your debts as possible, filing is the right course of action. If you believe there is another way to pay up your debts and not damage your credit score, it is best to look for alternatives.

 

Either way, consulting with an experienced bankruptcy attorney is the smartest way to evaluate all available options.

 

 

Find A Bankruptcy Attorney

 

Bankruptcy FAQ

Bankruptcy is a section of the law that allows debtors who are unable (fully or partially) to pay their outstanding debts to get a fresh start and get financial relief. Keep in mind that not all debts qualify to be removed in a bankruptcy case (e.g., student loans). The U.S. Supreme Court explains bankruptcy law as a way to give individuals and entities a new opportunity in life by starting fresh without the pressure and discouragement of preexisting debt. Federal bankruptcy law consists of chapters published in the Bankruptcy Code.
The U.S. Bankruptcy Law covers six different types of bankruptcy, each described in a separate chapter in the Bankruptcy Code. Although they differ in terms and procedures, their common goal is to provide permanent relief from certain outstanding debts. In other words, they help to discharge the debtor’s dischargeable debts. These are the different types of bankruptcy you can file: Chapter 7: This chapter provides liquidation of the non-exempt assets of the debtor. Certain assets, like a car or a home, may be exempt from bankruptcy, which means the debtor can likely keep them under this chapter. The court appoints a trustee who will oversee the debtor’s non-exempt assets and will handle their sale. The proceeds will go to the creditors. Chapter 7 is open both to individuals and businesses. Chapter 9: This chapter is intended to help municipalities to reorganize their debts. It is open to towns, cities, villages, municipal utilities, taxing districts, and school districts. Chapter 11: Intended to help partnerships and corporations, chapter 11 bankruptcy aims to provide a supervised reorganization of a business by allowing the debtor to keep running the business while following a court-ordered payment plan. Chapter 12: It consists of bankruptcy provisions for family farmers and fishers. Chapter 13: It is aimed at helping individuals with a steady regular income to create a repayment plan, usually within three to five years, and discharge the remaining dischargeable debt. Chapter 15: This chapter applies to cross-border bankruptcies that involve foreign parties.
Since bankruptcy can have a lasting negative effect on your credit, you should consider it a last resort option. It is a good idea to hold off on filing if you believe there is a chance to improve your financial situation or that you will have substantial expenses in the near future because there is a limit to how often you can file for bankruptcy. The moment you file for bankruptcy, this will trigger an automatic stay that will stop wage garnishment, lawsuits, foreclosure, and collection efforts. So, if you want to stop the repossession of your car or the foreclosure of your home, and you have the income to pay off that debt, it may be a good idea to file for Chapter 13, for example. Of course, you should ideally consult with a lawyer before you take any legal action. Is there a specific amount of debt to qualify for bankruptcy? Generally speaking, there is no preset minimum amount of debt you need to qualify for bankruptcy. However, certain debt limits apply to Chapter 13, for instance. The maximum amount changes constantly, but it currently is $383,175 for unsecured debt and $1,149,525 for secured debt. If your outstanding debt is relatively low, it’s wise to consider alternative solutions to bankruptcy to ensure that filing for one of the six chapters is still an option for you in the near future. It’s an important consideration because there are limits on how many times a person can discharge debts in bankruptcy.
It is possible, but it depends on the type of debt you have. Most consumer debt can be discharged in a bankruptcy case, but if you forget to include a debt in the process of filing, it will not be discharged. In addition to that, creditors have the right to object to the discharge of any debt. There are 19 categories of non-dischargeable debts that cannot usually be eliminated (unless a creditor decides not to challenge your effort to discharge them). Some of them include child support, alimony, certain tax debts, criminal restitution, and condo fee debts. Do I need a lawyer to file for bankruptcy, or can I do it on my own? It is allowed for individuals to file for bankruptcy without a lawyer. Debtors who decide not to use legal help in the filing process are responsible for understanding local court procedures and what relevant bankruptcy laws apply to them. In general, however, bankruptcy law is very complex and can be confusing. Understanding the process is key, and it is a good idea to consult with a bankruptcy lawyer about your circumstances to ensure you get the best outcome.
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