What Are the Consequences of Bankruptcy?
by Flora Tan
If you’re going through a challenging time financially, you may feel as though there is no way out. Bankruptcy may be the best solution to help you achieve financial freedom.
Like many things in life, bankruptcy comes with some consequences. When you file for bankruptcy, your credit score suffers, you may have to part with some assets, and you won’t be able to clear all of your debts.
While the consequences of bankruptcy can seem scary and may deter you from the process, they shouldn’t—the pros might outweigh the cons in your situation. For guidance with your bankruptcy case, consult with an unbundled lawyer.
Bankruptcy is a legal process that allows both individuals and businesses to either discharge their debts or create a plan to repay their creditors.
You can initiate a bankruptcy case by filing a petition with the court along with any required documentation. The court assigns a bankruptcy trustee to oversee your case and help you throughout the process; their responsibilities depend on the type of bankruptcy you file.
Bankruptcy tackles both secured and unsecured debt. Secured debt is debt backed by collateral, while unsecured debt is not protected by any. What happens to these debts depends on your situation and the bankruptcy chapter you file.
Chapters of Bankruptcy
There are six chapters of bankruptcy: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Chapters 7 and 13 are the most commonly filed bankruptcy chapters.
Chapter 7 bankruptcy allows you to discharge some debts and repay others. However, your bankruptcy trustee helps decide what assets to liquidate, as you’ll likely need to sell assets to help repay your creditors.
Fortunately, some exceptions exist to help individuals keep some of the most important assets, including cars and homes.
Chapter 13 bankruptcy, also called wage earner’s bankruptcy, allows you to create a repayment plan and submit it to the court for approval. Under this repayment plan, you’ll have three to five years to pay back your creditors and resolve your debts.
Individuals that make too much money to file under Chapter 7 often choose Chapter 13. Unlike Chapter 7 you’re not required to liquidate your assets.
Chapter 11 bankruptcy, also called reorganization bankruptcy, is commonly used for businesses. It lets businesses restructure their finances and come up with a plan to pay outstanding debts while also keeping the business up and running.
Chapter 12 bankruptcy is for family farmers and fishermen. It lets these businesses create a plan to repay debts while avoiding liquidating their assets or facing foreclosure.
Chapter 9 bankruptcy allows municipalities facing financial troubles to negotiate and repay their debts while affording to protect from creditors.
Chapter 15 was added to the U.S. Bankruptcy Code in 2005. Chapter 15 cases are often ancillary cases to already existing cases in foreign countries, the debtor’s home country. This chapter allows foreign debtors to utilize U.S. bankruptcy law.
Consequences of Bankruptcy
While filing for bankruptcy provides many benefits, there are also some consequences you must consider. Weighing out the pros and cons of filing for bankruptcy is crucial before initiating your bankruptcy case.
Bankruptcy Affects Your Credit
Foremost, filing for bankruptcy will affect your credit.
Your credit score takes a hit when you file for bankruptcy, and the effects can last for some time. For example, a Chapter 7 bankruptcy stays on your credit for 10 years, and a Chapter 13 filing remains on your credit report for 7 years.
Because bankruptcy can affect your credit report, it’s challenging to accomplish certain tasks, like getting new credit cards or applying for loans, while your credit score is suffering. While bankruptcy will not stay on your credit forever, and the effects will eventually improve, it is something worth thinking about.
You Can’t Clear All of Your Debts
Many believe filing for bankruptcy automatically means all your current debts are wiped away, and that could not be further from the truth.
Some bankruptcies, such as Chapter 7, allow for the discharge of certain unsecured debts, like credit cards or medical bills. However, you’ll need to repay other debts that are not discharged.
Some chapters of bankruptcy do not allow for the discharge of any debts, and you’ll have to repay all your debts. Nonetheless, bankruptcy helps pave the way for debt repayment and can provide more time to pay creditors what you owe.
Some Debts Remain Even After Filing for Bankruptcy
Bankruptcy does not wipe away all debts, and some debts also remain, as bankruptcy does nothing about specific debts.
Even if you file for bankruptcy, there are certain debts bankruptcy does not take care of, including:
- Child support
- Some taxes
- Student loans
Many believe bankruptcy can help with paying these debts or eliminating them, but that’s not possible—the responsibility to pay them remains, even after filing for bankruptcy. While bankruptcy provides a financial refresh for most debts, the legal process does not affect certain debts.
You May Have to Sell Some of Your Assets
One of the biggest fears individuals have with filing for bankruptcy is facing the possibility of losing assets. Some assets may be exempt and not subject to liquidation, but some, non-exempt assets, may need to be sold to put proceeds toward debt repayment.
Non-exempt property may include the following:
- Properties beside your home
- Art and other collectibles
- Certain investments
- Jewelry and other personal belongings
For many, it’s difficult to part with assets and personal property to resolve debts, but it is often necessary to achieve an improved financial situation.
Other Individuals May be Responsible for Your Debts
If you have a cosigner for a loan and you fail to make payments on that loan, the cosigner may become responsible for your debt. This can put a strain on the relationship, as it puts your cosigner in a bad situation.
For example, when you file for bankruptcy, an automatic stay comes into play, taking away your creditors’ rights to contact you or pursue repayment. However, if you file for Chapter 7 bankruptcy and you have a cosigner for a loan, the automatic stay rarely extends to the cosigner. Therefore, creditors may continue to harass your cosigner.
If you have a cosigner for any debt, you may need to take additional steps to protect them from creditors, even if you file for bankruptcy.
Should You File for Bankruptcy?
Bankruptcy is not for everyone, and sometimes you shouldn’t turn to bankruptcy immediately. Before beginning the bankruptcy process, it’s wise to consider whether filing is right for you.
If you’re considering filing for bankruptcy, ask yourself these questions:
- How long have I been struggling financially?
- Will I be able to pay my debts without bankruptcy?
- Are there other alternatives?
- Am I willing to face the consequences of bankruptcy?
Under these circumstances, you may want to either hold off on filing for bankruptcy or consult with a bankruptcy lawyer to weigh out your options:
- Your income is high
- You have the property you don’t want to lose
- You may be able to modify your mortgage
- You anticipate creating new debt soon
Because there are certain consequences to filing bankruptcy, think it through completely. Bankruptcy can be confusing, and you might be unsure of what to do. A bankruptcy attorney is best equipped to help you make the best decision for yourself and your future.
When Bankruptcy Is the Best Option
There is plenty to consider when thinking about filing for bankruptcy. However, if you face the following situations, bankruptcy may be the best option for you:
- You’ve been going through a financial crisis for an extended period
- You have multiple bills in collections you cannot pay off
- You’re at risk of losing your home
- You’ve experienced a significant life event that has affected your finances
- You’ve unsuccessfully attempted to negotiate your debts
- You don’t see any other solution to your financial struggles
When in doubt, discuss your situation with a qualified bankruptcy lawyer. A lawyer can address your questions and concerns, become familiar with your financial situation, and give you legal advice on how to proceed.
An Unbundled Attorney Can Help You Decide Whether Bankruptcy is Right For You
Hiring a bankruptcy attorney can benefit your case, but when you’re already facing a financial crisis, it can be difficult to spend the additional money on attorney’s fees. An unbundled lawyer can ensure you receive the legal guidance you need while keeping costs low.
If you feel confident handling certain parts of your bankruptcy case, your unbundled lawyer can step in and handle the rest. You’ll only need to pay your unbundled lawyer for the services you need, helping you minimize expenses.
Unbundled Legal Help has a vast network of unbundled lawyers waiting to assist you. We’ll get to know your needs and match you with an unbundled lawyer in your area.