Weighing the pros and cons of declaring bankruptcy

Pros of declaring bankruptcy

Filing grants you an automatic stay

When you file for bankruptcy, a judge grants you an automatic stay. An automatic stay stops creditors from taking any collection action. During the court proceedings, you briefly can ignore paying any outstanding debt. Your property cannot be seized, and you can focus on reorganizing your debt without any interference from creditors.

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You can choose to file for different chapters of bankruptcy

Depending on your debt relief needs, you can file different forms of bankruptcy. You can choose between a “liquidation” bankruptcy or a “reorganization” bankruptcy with chapter 7 and chapter 13 filings, respectively. You have a bit of autonomy determining how to navigate your debt instead of only being able to sell off your assets. Learn more about the different types of bankruptcy to make the best decision for your future.

Filing for bankruptcy clears off debt

The primary reason why you are considering bankruptcy is to clear your debt. If a judge approves your filing, your unsecured debt can be discharged. Old creditors can’t bother you for any debts that were dismissed. You can live life without significant debt looming over your head, improving your financial health and likely your stress levels too!

Filing for bankruptcy consolidates debt

Navigating multiple creditors hounding you for payments is a nightmare. They will contact your phone, send you mail, and your payments must be made timely to avoid causing further damage to credit score. By declaring bankruptcy, debt that isn’t discharged may be consolidated in a debt repayment plan. This makes your life just a bit easier. You can pay your debt off over time with a single payment instead of juggling multiple.

Some assets are exempt from seizure

When you file for a “liquidation” bankruptcy, a common fear of debtors is losing many of their assets. However, many assets may be protected and exempt from liquidation. You may be able to keep your home, car, and other assets depending on your state laws. The only exception to exempt assets is if the debt associated with them is secured, in which case, creditors can still take the asset.

Cons of declaring bankruptcy

Filing affects your credit

A bankruptcy filing can have long-lasting effects on your credit. Once your filing is approved by a judge, it shows up on your credit. In the immediate future, your credit score will drop. It will affect your ability to get a loan, secure an apartment, and even your ability to gain employment in certain industries. It can drastically affect your credit score, potentially dropping it by 100 points. Even after your debts are discharged, it stays on your report. Its length varies depending on the type of bankruptcy. A chapter 7 bankruptcy stays on your credit report for 10 years after filing. A chapter 13 bankruptcy remains on your report for seven years.

You can lose your assets

When you file for chapter 7 bankruptcy, the trustee assigned to your case will sell your nonexempt assets to pay off your creditors. These assets may include personal property (material goods like clothing and furniture), financial assets, your home, vehicles, and other items. Although some assets may qualify for an exemption, you will likely lose many assets to clear your debt. If you are a business owner, you can also lose this stream of income, depending upon the decisions of your trustee and judge.

You may still be responsible for some debts

Declaring bankruptcy does not necessarily discharge all your debts. There are some debts you will still be responsible for. Federal student loans, taxes, child support, alimony, and court orders must still be paid by a debtor.

It does not solve your financial problems

Your debt didn’t appear out of thin air. More than likely, compounding financial problems led to poor financial health and insurmountable debt. Once your debt is cleared, those financial problems will still exist. If you can’t alleviate your financial obligations, you will likely return to a precarious financial situation.

Declaring bankruptcy isn’t a decision you should make lightly. It has long-term consequences, and you should evaluate all options before filing for it. If you are struggling to pay various creditors, consider debt consolidation. Learn more budgeting tips to avoid damaging your financial health.