Should You Consider Bankruptcy?
Bankruptcy isn’t the end of the world. It may even be good for you. Before you file a bankruptcy case, it's crucial to weigh all your options. Although bankruptcy can relieve financial stress, it also has consequences, so you shouldn't take it lightly. Here are some pros and cons to consider.
Pro #1 – Bankruptcy Stops Collection Calls and Lawsuits
Filers often find that one major benefit of filing for bankruptcy is the mental and emotional relief it brings, not to mention the financial fresh start.
Getting behind on debts, bills, and other financial obligations can be extremely mentally and emotionally taxing. It can cause stress, impact your self-esteem, and even affect your relationships and your performance at work.
Once people fall seriously behind on their debt — with at least one account 120 days overdue, for example — their financial troubles tend to get worse. Balances in collections and the percentage of people with court judgments grew.
As soon as you file your Chapter 7 bankruptcy, this stops all collection actions from phone calls to wage garnishments. While the Chapter 7 bankruptcy process can take several months, many filers find that the automatic stay brings mental relief since they no longer have to deal with their creditors individually.
Con #1 – Impact on Your Credit Score
Credit bureaus and scoring experts often say bankruptcy is the single worst thing you can do to your scores. Foreclosures, repossessions, charge-offs, collections — nothing else can drive your scores down as fast and far as bankruptcy.
But that’s not the whole story. Most people struggle so long with their debt that their credit is already battered by the time they file for bankruptcy. And once they do, their scores typically rise, not fall. If the debt is erased — which is known in bankruptcy court as a “discharge” — scores go up even more.
Using data from Equifax credit bureau, researchers at the Federal Reserve Bank of Philadelphia found that filers’ Equifax credit scores plunged in the 18 months before filing bankruptcy and rose steadily afterward.
It can be difficult to get credit right after a bankruptcy. However, studies have shown that people who have completed bankruptcy are more likely to be granted new credit lines within 18 months than are people who fell 120 days or more overdue at the same time but didn’t file.
Your credit limits after bankruptcy are likely to be low, however, and your access to credit — like your credit scores — won’t recover completely until a Chapter 7 bankruptcy drops off your credit reports after 10 years.
Bankruptcy will also go on your public record. This means that if you apply for certain jobs, volunteer positions, or public offices, your bankruptcy will show up in a public records search. In rare cases, it may prevent you from getting a job or participating in something.
Pro #2 – Freedom From Many Common Debts
Chapter 7 bankruptcy wipes out many kinds of debt, including:
Credit card debt
Medical bills
Personal loans
Civil judgments (except for fraud)
Past-due rent
Past-due utility bills
Business debts
Some older tax debts
Some debts, including child support and recent tax debt, can’t be erased in bankruptcy. Student loan debt can be, but it’s very rare. But if your most troublesome debt can’t be discharged, erasing other debts could give you the room you need to repay what remains.
Con #2 – You Could Lose Some of Your Assets
Though it’s rare in Chapter 7 cases, you could stand to lose property, including your home, vehicle, or other valuables that aren’t fully protected by exemptions provided by Bankruptcy law. However, if you’re already at risk of losing your home or vehicle, bankruptcy might still be the best option for you and provide a way to keep them.
Financial Factors to Consider When Filing Bankruptcy
You’ll want to look at the types of debt and the amount of debt you have. If you have more than $10,000 in the types of debt listed above and you can’t keep up with the minimum payments on your debt each month, then filing bankruptcy may be worth it for you. This is especially true if a creditor or debt collector is threatening to sue or garnish your wages.
If you have less than $10,000 in debt and/or you’re able to pay at least the minimum payment on your monthly credit card bills and other debts, it might not be worth it to file bankruptcy at this time. That’s also true if you have a lot of debt that can’t be discharged like student loan debt, back child support or alimony payments, or recent tax debts. You may want to consider other options for dealing with your debt such as debt consolidation or a repayment plan negotiated with a credit counselling agency.
If you feel like you’re in a hole you can’t dig out of . . .
. . . then bankruptcy is something you should consider. You can continue trying to chip away at debts you may never be able to repay, prolonging the damage to your credit scores and diverting money you could use to support yourself in retirement. Or you can recognize an impossible situation, deal with it and move on.
You Need a Bankruptcy Attorney
Talk with one of our experienced bankruptcy attorneys. Filing bankruptcy is not among the DIY projects you should take on. It’s easy to make a mistake in the complicated paperwork, and an error could cause your case to be dismissed. If that happens, you end up with no relief — but still have credit scores tanked by the bankruptcy filing. Contact us today for a free initial consultation.