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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Legitimate Reasons for Bankruptcy


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Can You File Chapter 7 When Bills Are Current?

Bankruptcy can help you get a fresh start financially by erasing, or discharging, some of your debts or giving you time to pay them. Federal laws determine qualifications and procedures for filing Chapter 7 bankruptcy, and these laws do not require you to be late on your bills before you file your bankruptcy petition.

Chapter 7 Bankruptcy Laws for Personal Debt

Chapter 7 bankruptcy is one of several types of bankruptcy available to debtors. Under a Chapter 7 bankruptcy, any nonexempt assets you own are sold and the money distributed among your creditors. The court will then discharge any debts you still owe to these creditors. You must petition a bankruptcy court and meet certain eligibility requirements before you can obtain a Chapter 7 debt discharge.

Difference Between Bankruptcy Closing & Dismissal

When your bankruptcy case comes to an end, it is said to have closed, but how it closes could have a significant impact on your liability for your debts. For example, if the court discharges your bankruptcy, you are no longer liable for your debts. If your bankruptcy is dismissed, however, you are still on the hook for payment. Even worse, the automatic stay that prevents creditors from coming after you during the bankruptcy process can be shortened or eliminated altogether if you file for bankruptcy again in the future.

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