What Are the Advantages of Filing Bankruptcy?
by Unbundled Legal Help
Many people who qualify for bankruptcy don’t take advantage of it because they are unaware of the many benefits if they make this decision. While there are certainly a few drawbacks to filing bankruptcy; generally, the good outweighs the bad for most eligible people.
Advantages typically attributed to bankruptcy include:
- An automatic stay against creditors
- Discharged debts
- Eventually improved credit score
- Exemptions to allow you to keep your property
Specific benefits of bankruptcy depend on the Chapter you file, the amount and type of debt you have, the state where you live, and many other factors. If you are unsure whether or not bankruptcy is your best option, we can connect you with a local bankruptcy lawyer to help you decide to move forward or not.
Learn more about the advantages of bankruptcy below.
Is Filing Bankruptcy a Good Idea?
Bankruptcy itself is not necessarily a good or a bad thing. Its primary function is to protect consumers who have gotten in over their heads with debt and need relief. It can be the best option for individuals who cannot repay unsecured debts such as medical bills, credit card bills, and personal loans.
It will be beneficial to explore all other debt-relief options before moving forward with the bankruptcy process. However, many people wait entirely too long to file bankruptcy. Then their credit rating is usually in shambles and they have no other options.
If you find yourself in seemingly insurmountable debt, exploring your bankruptcy options may prove to be a very good idea.
Advantages of Filing for Bankruptcy
It is important to note that the specific benefits of filing bankruptcy depend on the type of Chapter you choose. By far, the most common forms of bankruptcy for individuals in the U.S. are Chapter 7 and Chapter 13. However, there are others designed for large business reorganizations and special groups. The most apparent advantages of bankruptcy include the following.
Automatic Stay Against Creditors
After you file your bankruptcy, the court issues an automatic stay against creditors. This halts certain debt collection activities immediately. While it doesn’t cancel your debt, it offers immediate relief while your bankruptcy case is processed or until the stay is lifted.
This means that all debt collection activities such as calls, letters, lawsuits, wage garnishments, foreclosures, and repossessions are temporarily stopped. If creditors attempt to collect debts after the automatic stay is ordered, your bankruptcy lawyer can pursue contempt of court actions.
While an automatic stay is helpful, it does not stop all kinds of actions against you. These include criminal proceedings, tax audits, child/spousal support collection, and relieving any co-signers of their financial responsibilities. In some cases, you can petition the courts to extend their original automatic stay order. However, you must meet specific requirements to be eligible.
In many bankruptcy proceedings, you can discharge (cancel) your debts. However, not all debts may be released. In most cases, your discharge is limited to unsecured debts such as medical bills, personal loans, credit card debts, utility bills, etc.
How and when your debts are discharged will largely depend on the type of bankruptcy you file. Chapter 7 bankruptcy discharges debt in a little as three to four months. On the other hand, with Chapter 13 and other types of bankruptcy, it may take three to five years to discharge those eligible debts.
Eventually Improved Credit Score
Your credit will likely take an initial hit when you file bankruptcy, no matter which type it is. In general, bankruptcy filings stay on a credit report for between 7-10 years. However, once dischargeable debts are canceled, many debtors find that their credit scores improve dramatically.
In some cases, credit scores and increased credit availability occur in as little as a few months once the debt is discharged.
Exemptions That Can Allow You to Keep Your Property
Chapter 7 bankruptcy uses a trustee who will review your assets and sell what they can to repay your unsecured debts. For this reason, many with significant property or assets choose Chapter 13 instead.
Nonetheless, there are exemptions available that allow you to keep some assets within a particular value. With Chapter 13, you can typically keep your property, but you will be required to make payments when the trustee’s payment plan is approved by a judge.
Disadvantages to Filing for Bankruptcy
Besides the potential benefits of filing bankruptcy, there are also a few disadvantages that all filers should be aware of. Filing bankruptcy at the wrong time can sometimes exacerbate your financial situation instead of improving it.
The effects of bankruptcy can be substantial in both positive and negative ways, depending on your circumstances. Consider the following disadvantages of bankruptcy before moving forward.
- Loss of credit cards
- The immediate impact on your credit score
- Difficulty obtaining credit for mortgages, car loans, and personal loans
- Increased interest rates immediately after filing
- Loss of assets and property
- Loss of tax refunds
- Difficulty getting a job or renting with a bankruptcy on your credit report
- Non-dischargeable debts that you still have to pay
How Bankruptcy Works
Federal bankruptcy courts oversee bankruptcies. The goal is to help people and businesses eliminate some parts or all of their debt. Depending on the type of bankruptcy and specific circumstances, all debt could be eliminated, or you may be required to repay a portion of your debt.
Other than Chapter 7, those with simple assets and debt, find the bankruptcy process can be tricky. Each Chapter has its own set of requirements and regulations that govern the process. Most individuals must complete debt counseling and a government-approved credit counselor before the procedure starts.
After credit counseling, you can move forward with the type of bankruptcy that best fits your situation. Since things can get complicated, working with a proven bankruptcy attorney can help ensure that your process goes as smoothly as possible, and you take advantage of all the options available to you.
Frequently Asked Bankruptcy Questions
As you are considering bankruptcy, you will have a lot of questions and concerns. Check out a few of the most frequently asked questions about bankruptcy below.
What Happens if I Declare Bankruptcy?
When you file for bankruptcy, one of the first things to happen is an immediate stop to debt collection activities. While this is only temporary, it allows you to take a breath while you prepare for the bankruptcy process. Shortly after that, a judge appoints a trustee to review your debts and prepare to sell your assets for repayment of all or part of what you owe (specifically for Chapter 7).
With Chapter 13, you must submit a repayment plan to your trustee that has the approval of a judge. Your creditors may dispute your plan but in many cases, once it’s approved by a judge, it will be finalized.
After your debts are discharged, you can expect a bump up in your credit score and plan for the opportunity to apply for more credit. If you do not make all of your payments, your appointed trustee may seek to dissolve the repayment agreement, and you will not get the debt relief that you desire.
Does Filing Bankruptcy Clear All Debt? - What Type of Debt Can’t Be Discharged Through Bankruptcy?
In rare cases, yes, bankruptcy can clear all your debt. However, bankruptcy is mostly for unsecured debts. Other types of financial obligations may not be discharged. Examples of non-dischargeable debt include:
- Student loan debts
- Federal, state, and local taxes
- Child support and spousal support
- Credit card debts used to pay secured debts
- Debt obtained through fraudulent actions
- Debts incurred via willful and malicious injury
Overall, there are more than 19 categories of non-dischargeable debts. If you are unsure which may apply to your situation, connect with an experienced bankruptcy lawyer to get the answers you need.
What Assets Can You Keep in Bankruptcy?
In Chapter 7 bankruptcy, there are exemptions to help you determine which assets you can keep, such as your house, car, etc. Retirement funds, pensions, and personal belongings are typically protected so long as they fall with the values set by bankruptcy laws. You can petition to keep certain assets, but you may have to make payments on them as usual.
With Chapter 13, you can keep all of your property so long as you comply with the repayment plan. This Chapter is only a reorganization, not a liquidation like Chapter 7. In most cases, your court-appointed trustee has the flexibility to decide what assets to sell and what assets you can keep.
How Much Cash Can You Keep When Filing Chapter 7?
You keep up to 75 percent of your cash from wages and up to $1,000 per person filing (up to $2,000 for a married couple). In many cases, the money earned after you file for bankruptcy is not considered in the bankruptcy proceeding itself, so you can begin rebuilding your savings immediately.
How Long Does it Take to Get to a 700-Level Credit Score After Filing Bankruptcy?
Assuming you have paid all of your bills on time and established new lines of credit, you can potentially attain a 700-level credit score four to five years after receiving a discharge. With Chapter 7, you can expect your credit to be on the upward trend as soon as a year after you file.
It’s important to note that bankruptcies can stay on your credit report for up to 10 years, depending on which type you file. While it is negative information, it does not always have an impact o your ability to raise your credit score or obtain new lines of credit after your discharge.
What Are Alternatives to Filing Bankruptcy?
For most people, bankruptcy is their last option, and with good reason. Nevertheless, there are some alternatives to explore before choosing bankruptcy. Some of the most popular include:
- Debt settlement
- Debt consolidation
- Selling assets and paying your debts
- Government-approved credit counseling
Filing for bankruptcy can have significant consequences for your finances, the ability to get credit, and where you live. It’s recommended to carefully consider all other options to pay off your debt before filing. However, don’t wait until it’s too late. Discuss your financial situation with a finance professional and/or bankruptcy lawyer before moving forward.
Do I Need a Lawyer to File Bankruptcy?
You are not required to hire a lawyer to file bankruptcy. Those filing a simple Chapter 7 bankruptcy who have little to no assets may not need legal assistance. However, every case is different. The need for an attorney depends on your case’s complexity and whether you are filing Chapter 7 or Chapter 13.
Chapter 13 is more complicated than Chapter 7. In addition to filing bankruptcy a Chapter 13, you must submit a repayment plan to your trustee, which can be difficult without an attorney. Also, if you have “priority debts” like child support, certain kinds of taxes, HOA dues, or other kinds of non-dischargeable debts, working with a lawyer helps you navigate the bankruptcy process better.
How Can I Access Legal Help?
Unfortunately, filing for bankruptcy is not cheap. In addition to the filing fees ($335 for Chapter 7, $310 for Chapter 13), attorney fees can quickly add up. Many lawyers will not start working on your case until they are paid in full. Fees can be as low as $1,200 for Chapter 7 and more than $3,000 for Chapter 13.
Our network of bankruptcy lawyers offers affordable pay-as-you-go services so you can begin the bankruptcy process quickly. In addition, you don’t have to worry about going into an office for your initial consultation. Our lawyers offer virtual consultations that you can schedule and participate in from the comfort of your home.
Before paying high upfront fees and potentially delaying your bankruptcy proceeding, request help on our site and get connected with an unbundled bankruptcy lawyer for a free consultation.