Advantages & Disadvantages to Declaring Bankruptcy

By Heather Frances J.D.

Bankruptcy is a court process available by federal and state laws to help both individuals and businesses shed unsustainable debt and get back on their feet financially. It offers a second chance at a clean financial slate, but it also has disadvantages. Bankruptcy may not be your only option to resolve your debts, but its advantages may outweigh the disadvantages in your particular situation. You may wish to consult an attorney before deciding whether bankruptcy is the best option for you.

Automatic Stay

When you file for bankruptcy, your case creates an automatic stay of collection proceedings against you. This means your creditors must cease their collection efforts, and they cannot begin again until the case is resolved. This stay even applies to foreclosure proceedings, so your house can be saved. While the debt collection efforts are stopped, your bankruptcy case continues, bringing you closer to debt relief.

Debt Relief

One of the biggest advantages of bankruptcy is the possibility of having a relatively clean slate to begin again financially. If you file under Chapter 7, your assets are sold to pay your creditors. If you file under Chapter 13, you will make payments on a structured repayment plan. At the end of either type of bankruptcy, many of your remaining debts may be discharged if you properly completed the requirements of your case. For example, under Chapter 7, if you still owe $5,000 on a credit card after all of your nonexempt assets are sold, that debt can be erased and you no longer owe the $5,000. However, not all debts are eligible for discharge. For example, student loans typically are not dischargeable, so you must continue to pay these even after your bankruptcy case is complete.

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Exempt Assets

Even under Chapter 7, where assets are sold, federal and state laws provide exemptions for certain assets. This allows you to keep these assets rather than see them sold to pay your creditors. Exemptions often include assets such as equity in your primary residence, clothes, books, appliances and a vehicle, though some categories of assets have maximum values attached.

Difficulty and Expense

Bankruptcy isn’t easy or cheap. You must complete credit counseling before you even file and again before your case is completed. You will have to pay filing and administrative fees to the court, and your case may require hiring an attorney who also must be paid. Under Chapter 7, you may lose assets that are important to you if they don’t qualify for an exemption. Under Chapter 13, you’ll have to make monthly payments for three to five years.

Future Impact

A bankruptcy is often viewed by others as a moral failing, and it can damage your ability to get a job or qualify for professional licenses, particularly if the job or license has a relationship to financial management. Bankruptcy remains on your credit report for up to 10 years, and it may hurt your credit rating for years. However, your credit may already be poor from your level of debt, so this disadvantage may not have much of an impact on your situation.

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References

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How Does Reaffirmation in Bankruptcy Work?

Bankruptcy is about fresh starts. Filing for Chapter 7 protection allows your bankruptcy trustee to liquidate property you own outright, without liens, and apportion the proceeds among your creditors, although you can use exemptions to protect some property. You have to qualify by meeting certain income requirements, but if you do, bankruptcy legally erases any debts the trustee can't pay through liquidation. The bankruptcy process discharges them and you're not liable for paying them any longer – unless you reaffirm them.

What Happens When You Reaffirm a Vehicle After Bankruptcy?

Bankruptcy allows you to get a fresh start financially, clearing up debts by paying some and dismissing others. Filing Chapter 7 bankruptcy, also called "liquidation" bankruptcy, doesn’t mean you have to give up everything you own, even if you still owe money on some of your assets. If you reaffirm your obligation to pay for an asset, such as a vehicle, you can keep that asset. However, without reaffirmation, you could lose your vehicle after your bankruptcy proceedings if you still owe money on a car loan.

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When you file a petition for bankruptcy, you are asking a federal court for protection from creditors and time to work out your financial difficulties. In a Chapter 7 case, the court authorizes a trustee to seize your assets and sell them in order to repay creditors. In a Chapter 13, the trustee sets up a repayment plan, taking into consideration your assets as well as your income. Unless the case is dismissed, both kinds of bankruptcy conclude with a cancellation of debts you owe to some — but not all — of your creditors.

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