Bankruptcy Pros and Cons

The Pros of Bankruptcy

Immediate Relief from Debt Collectors
There’s a feature of bankruptcy which stops debt collectors from contacting you the moment you file. This is called the “automatic stay.” The automatic stay gives you legal protection from creditor actions against you. The automatic stay varies in length depending on whether you have ever filed for bankruptcy before.
 
If bill collectors still try to contact you, the court can penalize them. If they try to reach you, just give them your bankruptcy case number.
 
Prevent a Water, Gas, or Electricity Shut Off
The automatic stay applies to utility companies.  So bankruptcy enables you to keep your water, gas, and electricity flowing.

Debts Will Be Erased
Bankruptcy can wipe out many debts from credit cards, doctor bills, personal loans, lawsuits, utility companies, and telephone companies.
 
But some debts cannot be eliminated with Chapter 7: student loans, most tax obligations, government judgments/penalties, some housing fees, child support and alimony.

A Poor Credit Score Will Improved
Most people’s credit score, when filing for Chapter 7 bankruptcy, is below 600. By eliminating debts and the number of creditors, your credit score will probably go up after filing. It’s not unusual to see a 40 point increase within six months.
 
Once your bankruptcy discharge comes through, you have various ways to start to rebuild your credit:  getting a secure credit card, becoming an authorized user on somebody else’s card, taking out small or secured loans and paying them back quickly, and sticking to a budget.
 
As soon as you receive your discharge, you should request a credit report. Check to see if everything on it is correct. If you see errors, request the credit reporting agency correct them immediately.
 
Those options will start to help you increase your credit score after bankruptcy and create a better financial future than you would otherwise have.

Your Wages Won’t Be Garnished
Wage garnishment happens when a creditor gets a court order requiring your employer to send part of your paycheck to a creditor.  But once you file for bankruptcy, the automatic stay stops the garnishment.
 
This, in turn, can improve your income since you get to keep all the money you make at work. Depending on your situation there can be a few exceptions:  student loans, taxes, and child support.

Get a Fresh Start and a Chance to Regroup
Filing for bankruptcy is intended to give you breathing room. Regardless of the type of bankruptcy you file, you’ll be able to regroup. You will be able to focus on going forward. Demand letters and many legal threats will end. The process will stop calls from creditors to your home, family, and workplace. With luck, filing for bankruptcy may let you sleep better at night, and recover from the downward emotional spiral that overwhelming debt causes.

Recover Your Suspended Driver’s License
If your driver’s license has been suspended for not paying parking tickets or driving without insurance, filing for bankruptcy can help get it reinstated.

Stop Foreclosure, Tax Sale of Your Home, Eviction from an Apartment
When you file for bankruptcy the automatic stay can block or delay attempts by your bank or landlord from foreclosing on your home or evicting you from an apartment..

Prevents a Car from Being Repossessed
If your payments are current, your bankruptcy filing prevents your car from being repossessed, unless the lender can get a specific court order. If your vehicle has already been repossessed—but not yet resold--filing for bankruptcy might help you get it back.
 
Once the automatic stay is in place, you can negotiate with your lender to “redeem” the debt, under which you accept the debt and resume payments even after your bankruptcy filing.

Maintain Your Life
When the prospect of bankruptcy feels like failure, pride can delay taking a difficult step in life. But once it’s done, bankruptcy ensures you’re able to establish a new baseline for going forward with your life. Bankruptcy typically protects your home, enabling your family to maintain a basic quality of life. Since cars are normally protected as well, you’re not stopped from working. With these two elements taken care of, you can go forward, making money and reestablishing your life. So, in reality, filing for bankruptcy, especially Chapter 13, enables you to continue being productive.
 
What Are the Cons of Bankruptcy?

It’s an Ongoing Process
Often, bankruptcy isn’t a quick, simple step. There’s the often-complex process of filing. After that, you have more work ahead, and other possible bumps in the road. For instance it's possible you could have your debt relief cancelled if you end up inheriting money, or start making a lot of money. Chapter 13 requires you to continue making payments. If you don’t, that can cause more problems. Even though sound financial management after filing for bankruptcy is usually a simpler alternative than trying to resolve an impossible level of debt, it still means you have to make serious commitments and lifestyle changes.

Long-Term Ramifications
You will lose your credit cards. You won’t be able to spend like you did before. Some previously routine tasks may get harder. Hotel, plane, and rental car reservations will be more difficult, for example. Bankruptcy reduces your chance of getting some loans. It may be more expensive to rent an apartment. Bankruptcy stays in your credit history for 10 years. But, while it may be some time before you’re able to fully recover, banks may well find that you’re a good client for new loans and credit cards. So it’s not a dead end by any means. An increasing number of traditional and other lenders are willing to extend credit to recovering bankruptcy filers, and help them move forward rebuilding.

Your Good Credit Score Will Drop
If your credit rating is now 700 or better, bankruptcy will definitely make it go down. But since most filers already have bad credit, they usually see improved credit scores after they file.

Limits to How Often You Can File Again
Once you file for Chapter 7 you must wait 8 years before you can do it again. So if you get into financial trouble again, you’re going to have to wait a long time to resolve the problem with Chapter 7 bankruptcy again. So it’s critical you take this into account when you discuss your financial situation and options with an attorney, and make sure you don’t expect even more debt to land on you after you file.

If you filed a  Chapter 13 before, and want to file for Chapter 7, you have to wait 4 years between the two cases.

Bankruptcy Will Not Erase Student Loans
Student loan debt can’t typically be removed in bankruptcy. You will probably still have to pay it off.
Although a very few people have successfully convinced the courts that their student loans would cause undue hardships and gotten those loans partially erased, this is rare.  According to one study, “of people who filed for bankruptcy in 2007 and had student loans, only an estimated 0.1% attempted to have their college debt discharged.”

Most Tax Debts Cannot Be Erased
Bankruptcy can only erase tax debts older than 3 years. And you have to prove you didn’t deliberately avoid paying your taxes.

You May Lose Valuable Property
When people filing for Chapter 7 bankruptcy don’t own any property which can be liquidated, these are called no-asset cases.

But any valuable property you own, such as a car or a house, will likely be liquidated to pay your creditors, depending on which state you live in. Discuss with your attorney whether any expensive property you have will fall under one of the exemptions, or if you will be forced to lose that property.

Everyone You Owe Money to Will be Notified
When you declare bankruptcy, the court notifies everybody you owe money to. If you owe them money, that will include friends and family. You can’t keep your bankruptcy a secret. It goes into the public record.

If you hesitate for people to know you are filing for bankruptcy, keep one thing in mind. This is a necessary first step toward a new start for yourself, Notifying people you owe has to be done in order to protect you from having to pay those debts back. It's a necessary trade off.

Recent Debt Payments Can Be Recovered
For example, if you repaid a family member for a debt in the past year, the trustee can recover the funds from your family, and instead, distribute them equally to everyone you owe, instead of just that person.

You Cannot Hide or Divert Money—Fraudulent Transfers
A transfer of your assets or money before declaring bankruptcy is considered a “fraudulent transfer”:

1) when you or dispose of property just before filing for bankruptcy to keep property like a car or house out of the hands of creditors; or
2) if you sell property for less than it’s actual value.

Part of the bankruptcy process is a meeting with a court appointed trustee called a “341 meeting.”
During this meeting the trustee will look for suspicious transfers, and then, if he believes they were fraudulent, cancel those by using any legal means at his disposal.

Your Co-Signers Will Be Liable for any Debts Erased
If you hold debts jointly with another person, co-signed by a spouse or someone else, the co-signor will become responsible for repaying the debt—even if you are no longer obligated.

You will need to let anybody know with whom share a debt, that you are going to file bankruptcy before you do. They’ll also be notified after you file.

Bankruptcy Costs Money
Bankruptcy can cost from around $400 to over $3000 including filing and attorney fees.

The filing fee is $335. Mandatory credit counseling is $14.95. If you don’t have enough money to pay that, you can request the court waive the filing fee, or let you have a payment plan.

One of the biggest bankruptcy expenses can be hiring an attorney. Some people cannot afford the $1,300 it typically costs just to get help with the paperwork.  Call us and find out what your bankruptcy will cost, and how you can pay for it:  (804) 294-3003.