What is the Downside of Bankruptcy?
by Philip Ahn, Attorney
Bankruptcy gives individuals a fresh start financially. Keep in mind that filing for bankruptcy is a serious matter. Your bankruptcy claim will negatively impact you if you don’t understand the negative consequences of filing for bankruptcy.
Bankruptcy could appear on your credit report for up to 10 years. It could also affect your ability to secure a mortgage, get employment in the financial sector, obtain a car loan, or file for bankruptcy again. Lastly, bankruptcy does not discharge all types of debts.
Deciding to file for bankruptcy can be a drastic undertaking. The disadvantages to filing bankruptcy can be considerable. That’s why it’s crucial to consult with a bankruptcy attorney to decide if or when bankruptcy is your best choice.
Continue reading below for more information about the downside to bankruptcy.
How Bankruptcies Work
Bankruptcy is a legal process designed to help individuals and businesses eliminate all or part of their debt. The federal government handles bankruptcy. However, states play a crucial role in the bankruptcy exemption process. Bankruptcy allows individuals and enterprises to wipe out certain debts, repay some of what they owe, and get a fresh start.
Bankruptcy could help relieve you of debts like medical bills, credit card bills, personal loans, etc. Declaring bankruptcy has long-term credit implications. It can also affect your professional life, living situation, ability to obtain credit, and more.
If you decide to proceed with bankruptcy, you’ll have to determine if you should file Chapter 7 or Chapter 13. Learn more about each below.
Chapter 7 bankruptcy allows individuals to liquidate their assets to pay creditors. Chapter 7 pays off unsecured debts first, including credit card debt, medical bills, and personal loans. It can sometimes help with other types of debt, but the process may be complicated.
Filing Chapter 7 typically involves completing forms with a review of your assets by the trustee. Chapter 7 bankruptcy provides immediate relief by temporarily stopping all collection activities through an “automatic stay.”
Most individuals who file for Chapter 7 bankruptcy get to keep their possessions. Chapter 7 filings even allow you to choose whether you want to continue paying for your car. The goal of Chapter 7 is to eliminate debt. The goal of Chapter 13 is to restructure it. Learn more below.
Chapter 13 assists debtors in reorganizing their finances under the court’s supervision and approval. Individuals, married couples, the self-employed, and those operating an unincorporated business are eligible to file for Chapter 13 bankruptcy.
Chapter 13 stipulates that debtors must submit and follow through with a repayment plan to outstanding creditors within three to five years. With a Chapter 13 bankruptcy, individuals pay an agreed-upon monthly amount to an impartial, court-appointed trustee.
The COVID-19 pandemic has been very tough on business. The CARES Act includes several bankruptcy law changes that make the process more available to businesses and individuals experiencing economic hardship.
Disadvantages of Bankruptcy
Experts agree that bankruptcy should be a last resort. Bankruptcy doesn’t make your financial problems magically vanish, and there are a few disadvantages including:
Your Credit Score Takes a Hit
Bankruptcy can appear on your credit report for seven to ten years. This hit could appear longer if you apply for a loan greater than or equal to $150,000. The impact your credit score takes will depend on your credit before filing for bankruptcy. Remember that you will also lose all credit cards.
You May Lose Property
If you have equity in your home, a Trustee will need to determine your home’s value and distribute proceeds from its sale to creditors. Bankruptcy affects what assets you lose or keep.
If you owe more money to your creditors than the total value of all you own, then you are considered insolvent. If you’ve maintained up-to-date mortgage payments, then filing for bankruptcy does not mean you will automatically lose your house.
It Can Affect Your Mental Health
Bankruptcy can create a significant amount of uneasiness in your life. Many people experience feelings of desperation, anxiety, depression, and incompetence. Even though bankruptcies are relatively normal in the U.S., there is a social stigma that is embarrassing for those in bankruptcy proceedings.
Obtaining a Loan May Be Difficult
It is possible to get an unsecured personal loan after filing for bankruptcy. Still, you’ll have to wait for your bankruptcy to age and your credit to improve before getting approved for a reasonable loan agreement.
Renting a Home or Apartment Can Be a Challenge
If your bankruptcy case is still ongoing, then a landlord will be hesitant to rent to you. Typically, landlords are resistant to waiting when they have to get the new debt obligation approved by the court.
Landlords may be hesitant to rent to you for the two years immediately following your bankruptcy case. Landlords can and usually do review the date you filed for bankruptcy. As time progresses, the filing will have less of an effect on your ability to rent.
If There Are So Many Disadvantages – Why File Bankruptcy?
Bankruptcies sometimes get categorized as all good or all bad, but they don’t have to be. For people with large debts who are unable to repay, declaring bankruptcy could be the answer to setting their financial lives back on course.
Bankruptcy proves to be a better alternative for those behind on their mortgage payments. It also helps those in danger of foreclosures and claimants harassed by bill collectors.
It is a great idea to weigh the costs and benefits of bankruptcy before deciding. Here are some alternatives to bankruptcy. Experienced bankruptcy professionals understand the weight of filing Chapter 7 and Chapter 13, and that’s why anyone considering bankruptcy should consider these alternatives first.
What Are the Alternatives to Bankruptcy?
Large debts don’t automatically mean financial ruin. There are options other than bankruptcy for those behind on their financial obligations. In many instances, it’s possible to devise a strategy that decreases your debts while avoiding the endgame that bankruptcy often represents.
Bankruptcy alternatives have helped people to evaluate their situation and find a better course of action. Bankruptcy could be your only option, but in some cases, it might be better to negotiate a debt settlement or debt consolidation plan that can help you avoid court and prevent further damage to your credit score.
Bankruptcy filings have a lasting impact on a person’s finances, so consider the following alternatives before filing:
Consolidate Your Debts
Personal loans from a bank or credit union or a home equity credit line can be used to pay off your debts. Consolidated payments can often save on interest. Debt consolidation can combine multiple bills into one, saving you time, energy, and effort.
Debt Repayment Options
Credit and debt counseling agencies offer debt management programs to pay back creditors over time, similar to Chapter 13 plans. Working with a credit or debt-counseling agency provides the distinct advantage of avoiding a bankruptcy filing in your credit report.
Sell Assets to Repay Debts
When your income isn’t sufficient enough to pay your debts, then you can consider selling your assets. The more valuable your property, the more funds you’ll raise for debt payments.
Chapter 7 bankruptcy filers typically are required to sell many of their assets. If you have valuable assets, you may be able to subdue your debts enough not to have to file bankruptcy.
For business owners, selling assets could help avoid a bankruptcy filing. It’s essential to have a clear strategy in mind, consult with experts, and be sure to retain the items necessary to keep your business functioning.
Enroll in Credit Counseling
Nonprofit credit counseling agencies can consolidate your debts through a debt management program. Debt management programs allow the agency to collect a single monthly payment from you and manage your creditor payments. Even if you decide filing bankruptcy is best, the law dictates that you must first consult a credit counselor.
Settling Your Debts
Borrowers could agree with their creditors to pay less than what they owe. Debt settlement entails debt forgiveness, and debt collectors have to accept fractions of the payment to settle the entire balance.
Is it Better to File Bankruptcy or Just Not Pay?
Sometimes, individuals in severe debt should take no action at all — especially those who don’t have much income or assets. If a creditor sues you and obtains a court judgment, they won’t be able to collect from you because you won’t own any property that they could legally seize.
You won’t get thrown in prison for not paying your debts, except with child support or refusing to pay taxes in protest. Creditors aren’t allowed to take away your essential clothing, ordinary household furnishings, personal effects, food, Social Security, unemployment, or public assistance benefits.
If filing for bankruptcy gets rid of enough of your financial obligations, you’ll have more money to pay off non-dischargeable debts and save money. In that case, filing for bankruptcy may be beneficial.
Contact Us to Learn How Unbundled Legal Help Can Assist You Today
Bankruptcy doesn’t have to be disadvantageous, especially for those looking to have their unsecured debts discharged or debt restructured. Unfortunately, bankruptcy can be costly and most bankruptcy lawyers don’t get started on your case until they receive payment in full.
Our bankruptcy lawyers offer flexible and affordable pay-as-you-go options so they can get started immediately. We also offer virtual consultations so you can begin the bankruptcy proceedings immediately from the safety and comfort of your home.