The Advantages and Disadvantages of Filing for Bankruptcy
When it comes to filing for bankruptcy, most financial advisers will tell you one thing: make sure that you’ve exhausted all of your other options before seriously considering bankruptcy. It’s a very big decision to make and it will affect your financial opportunities for many years; that being said, bankruptcy isn’t necessarily the worst thing in the world. You’ll certainly want to discuss the matter with a professional financial consultant before making any big decisions, but here are just a few points about the advantages and disadvantages of filing for bankruptcy.
First of all, bankruptcy is often considered to be a fresh start. You may not be able to have all of your debts cleared, but you’ll be able to have a significant amount of outstanding debts discharged. Even if all of your debts aren't discharged in the bankruptcy process, you'll be able to work with consultants and creditors to create a feasible repayment plan that doesn't involve regular harassment and threats made by debt collectors.
In fact, the moment you file for bankruptcy, creditors are required to stop contacting you for as long as the bankruptcy process lasts. For the debts that are discharged, creditors and debt collectors that would normally be contacting you about those payments are no longer allowed to contact you or request that any amount of the discharged debt be repaid.
And finally, although you’ll be required to surrender a significant amount of your property and personal belongings in order to repay some of your debts, there are certain types of property that are exempt from bankruptcy collectors. This includes essential items like cars (up to a certain value), clothing, pets, and portions of your regular income.
Nevertheless, there are reasons why financial advisers say that bankruptcy should only be used as a last resort. The biggest disadvantage with bankruptcy is that it stays with you for years -- bankruptcy filings usually remain on credit reports for anywhere from seven to 10 years, and it’s nearly impossible to obtain a loan or open a new line of credit during this period. Credit card companies often close the lines of credit you have with them -- the minute you file for bankruptcy, in fact -- and if you end up in an emergency situation without enough money, your borrowing options are pretty limited.
Your financial opportunities are naturally going to be limited by bankruptcy, but many people don’t realize that the negative effects of bankruptcy go even further than that. You may be denied housing or employment, because landlords and employers may be able to see your credit report and decide that you are too much of a risk. There are currently no laws against landlords or employers denying someone housing or employment because that person has filed for bankruptcy.
Contrary to what many people believe, filing for bankruptcy doesn’t mean that all of your debts will magically disappear. You’ll actually still be required to pay off some debts, like student loans or tax debts, and creditors will be allowed to confiscate a lot of your personal property as partial repayment for the debts you can’t pay back. Some property is exempt from collection, as dictated by state laws, but this tends to include only the most essential items. And surprisingly, it’s actually possible to not have enough money to file for bankruptcy. When you file for bankruptcy, you’ll have to pay attorney fees and court fees (which could cost thousands of dollars when it’s all said and done).
And finally, even though it doesn’t directly affect you, there is a ripple effect that occurs when you file for bankruptcy. When your debts are discharged, that means that your creditors aren’t getting the money back they lent to you. This doesn’t just mean that huge credit card companies are experiencing a loss of a few thousand dollars (which they’ll probably earn back quickly enough from someone else’s interest rate fees); many smaller lenders and financial institutions will be hit particularly hard if their debtors cannot pay back their balances. Additionally, when you sign for loans, you often have to have a cosigner who agrees to cover your debts if you are unable to do so; when you file for bankruptcy, your cosigners will be required to pay off your debts, or else their credit scores will drop too. The entire economy suffers when too many people are unable to repay their debts.