“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
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.
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.
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.