Filing for Bankruptcy: Is it the Right Choice? Pros and Cons You Need to Know Now!

When you’re struggling with significant debt and feeling like there’s no way out, the option of filing bankruptcy may seem attractive – but is it truly worth the financial relief? The truth is that filing for bankruptcy can have both pros and cons, which must be carefully considered prior to taking any action. In this article, we will take a look at the pros and cons of filing for bankruptcy in order to provide you with an understanding of whether or not it should be your go-to solution when navigating complicated money matters.

What is Bankruptcy and How To File?

Bankruptcy is a legal process that can provide debtors with a fresh financial start. It may involve discharging some or all of their existing debts or restructuring their payment plan under court supervision.

Individuals or businesses typically file for bankruptcy when they have made a sincere effort to repay their debts but are unable to do so. To file for bankruptcy, you must file a petition with the bankruptcy court that includes information about your income, assets, expenditures, and liabilities. While some debtors may choose to represent themselves, many opt for legal assistance. It’s important to remember that while bankruptcy can provide you relief, it also has certain consequences and should be considered a last resort. 

Types of Bankruptcy

There are different types of bankruptcies available in the United States, each with unique features and eligibility requirements. The most common types are:

• Chapter 7: Intended for individuals or businesses with significant unsecured debts and limited income or assets.
• Chapter 13: Designed for individuals with regular income but are struggling with debt and want to reorganize their finances
• Chapter 11: Applicable to businesses that want to restructure their debts and continue their operations. It is also available to individuals who have a significant amount of debt and do not qualify for Chapter 13 bankruptcy.
• Chapter 12: Designed for family farmers or fishermen with regular annual income.
• Chapter 9: Available for municipalities, such as cities, towns, and counties, to restructure their debts and continue providing services to their residents.
• Chapter 15: Reserved for foreign companies or individuals who have debts and assets in multiple countries.

Pros of Filing for Bankruptcy

Filing for bankruptcy can be a complex process. However, it often offers individuals and business owners the opportunity to get on their feet and make a fresh start. Although filing should always be your last resort, if you are already experiencing significant financial hardship, you could benefit from the relief it provides.

1. Automatic Stay

Filing for bankruptcy results in an automatic stay, which stops collection actions by most creditors, including the IRS. As a result, the IRS cannot initiate new collection actions, garnish your wages, or seize your assets during the bankruptcy process. Additionally, an automatic stay can prevent foreclosure on your home and temporarily suspend ongoing legal proceedings against you that involve debt collection efforts.

2. Debt Relief

Bankruptcy can provide you with the opportunity for a fresh financial start by discharging certain types of unsecured debt. Unsecured debt refers to debt that is not backed by any collateral. This includes car, house and debts like credit card debt, medical bills, and personal loans. Bankruptcy may provide debt relief for these types of debt, which means that you will no longer be responsible for paying them back.

3. Debt Reorganization

Filing for bankruptcy also allows you to reorganize your debts and repay them over a three-to-five-year court-supervised plan. The benefit of this is that it gives you a chance to pay off your debts in less than the usual amount of time and at much lower interest rates, which can help you get back on your feet financially.

4. Rebuild Your Credit Score

Declaring bankruptcy may initially hurt your credit score as the filing can remain on your credit report for 7-10 years. Nevertheless, once you have eliminated your debts and started anew, you can work on rebuilding your credit over time. Without any outstanding debts, you can prioritize paying your bills promptly, leading to a gradual increase in your credit score.

5. Education 

If you file for bankruptcy, you must undergo credit counseling. The sessions can provide you with valuable lessons on personal finance and debt management. This can help you avoid repeating the same financial errors that led you to bankruptcy in the first place. In addition, as part of the bankruptcy process, you need to take a financial management course. It can provide additional information on budgeting, saving, and credit management. By acquiring this knowledge, you will be able to manage your money better and prevent going back into debt after your bankruptcy has been discharged.

Cons of Filing for Bankruptcy

Although filing for bankruptcy offers significant pros for managing debt, it also comes with some cons. 

1. Drop in Credit Score

Filing for bankruptcy can have a significant negative impact on your credit score. Even though it is possible to rebuild your credit score over time, you will initially experience a decline in your score after filing for bankruptcy. Additionally, bankruptcy will stay on your credit report for 7-10 years. As a result, you may find it difficult to obtain credit or loans during that time. Even after the bankruptcy is no longer on your credit report, it may still affect your creditworthiness and ability to borrow money as some lenders may view you as a higher-risk borrower.

2. Loss of Assets

Another disadvantage of filing for bankruptcy is the potential loss of assets, particularly when you file for Chapter 7 bankruptcy. This type of bankruptcy requires liquidating non-exempt assets to repay creditors. Non-exempt assets may include valuable property like your home, car, or other assets that are not protected by state or federal exemptions. Losing such assets can be a significant setback, especially if you rely on them for your livelihood.

3. Public Record

All records filed in a bankruptcy case are considered public records except for confidential information such as Social Security numbers. This means that anyone will be able to view your bankruptcy filing.  This includes potential employers, landlords, and lenders who may view the bankruptcy as a red flag and affect your ability to get a job, rent a home, or obtain credit in the future. This public record can be accessed for up to 10 years. This can make it challenging to rebuild your financial reputation.

4. Certain Debts Are Nondischargeable

It is important to remember that filing for bankruptcy only eliminates some of your financial responsibilities. For instance, student loans generally cannot be discharged, unless you can prove that paying them would cause you undue hardship. In addition to student loans, there are other financial obligations that cannot be discharged through bankruptcy. These include tax debts, court-ordered payments such as alimony and child support, debts resulting from illegal activities, and other court judgments.

5. Costly and Time-Consuming

The process of filing for bankruptcy can be both costly and time-consuming. Depending on the type of bankruptcy you file, court and attorney fees might range from a hundred to several thousand dollars. Also, you may need to pay additional fees for credit counseling and financial management classes.

Filing for bankruptcy can also take a significant amount of time, anywhere from a few months to several years. This involves attending court hearings, providing documentation, and attending counseling sessions, which can be time-consuming and may require taking time off work. The costs and time commitment involved in filing for bankruptcy are important factors to consider before deciding to file.

Should You File for Bankruptcy?

Deciding to file for bankruptcy is a difficult choice and that you should not take lightly. You should always seek expert assistance, like that of a bankruptcy attorney to determine your best course of action. Additionally, understanding the different types of bankruptcy and how they work might help you make the best option for your situation. Before you decide to file for bankruptcy, it is important to consider all aspects and implications of filing, such as the pros and cons and the long-term consequences such as difficulty obtaining credit in the future. Making informed decisions can help you protect your well-being and finances in the long run.