The Pros And Cons Of Filing Bankruptcy – Don’t Start Without Reading This First!

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Published on July 15, 2020

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Are you considering filing for bankruptcy? If you’re heavily in debt and you feel that you cannot manage to pay your creditors back, bankruptcy can be an option for you to have a fresh start. Filing for bankruptcy can help individuals and businesses survive an economic crisis such as Covid-19. 

You have to recognize, however, that there are pros and cons of filing for bankruptcy. While bankruptcy can give you debt relief, you also have to know that there are also associated downsides. The advantages and disadvantages of bankruptcy will depend on your current financial situation and the type of bankruptcy you’re filing for.

There are two types of bankruptcy that individuals commonly go for: Chapter 7 and Chapter 13. The majority of the bankruptcies filed in the United States are Chapter 7 bankruptcies. However, you would have to meet the income eligibility to be able to file for Chapter 7. 

Individuals who do not meet the income requirement, meaning they are making a larger sum of money, are often forced to file for Chapter 13 as an alternative. However, some people prefer Chapter 13 over a Chapter 7 because of certain factors.

Pros and Cons of Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is also referred to as a “liquidation” bankruptcy because your assets are sold to pay off your creditors before your debts are wiped out. Before you file, it is important to inform yourself about the pros and cons of filing bankruptcy under Chapter 7. Many people file for a Chapter 7 bankruptcy without fully understanding that aside from the advantages, there are also disadvantages that could affect your financial future.

A Quick Navigation
Advantages of Filing Chapter 7 Bankruptcy
Disadvantages of Filing Chapter 7 Bankruptcy

Advantages of Filing Chapter 7 Bankruptcy

1. You Can Erase Most if Not All of Your Debts

With a Chapter 7 bankruptcy, it is possible to wipe out all of your dischargeable debts, as long as fraud or misconduct was not committed in connection with these debts. 

Some examples of common dischargeable debts:

  • credit card debts
  • medical bills
  • personal loans
  • utility bills
  • dishonored checks
  • deficiency balance from a repossession
  • business debts
  • past due rent
  • social security overpayments
  • civil court judgments that are not based on fraud
  • collection agency accounts, etc.

2. No Repayment Involved After the Debts are Discharged

You don’t have to pay for anything after the bankruptcy process. What many people find advantageous is that after they file for Chapter 7, they are no longer encumbered with their debts. Unless you have non-dischargeable debts, you can be totally debt-free.

3. Clean Slate

Because most of your debts will be discharged, a Chapter 7 bankruptcy can allow you to start anew. You can keep whatever property you acquire (except inheritance) as long as you acquire these after filing for the Chapter 7 bankruptcy.

4. 3-6 Month Process

The entire Chapter 7 bankruptcy process from filing to debt relief only takes three to six months. The relatively short duration will allow you to quickly get back on your feet.

5. Debt Collectors Will Stop Hounding You

Once you file for a Chapter 7 bankruptcy, an “automatic stay” will go into effect. This will stop creditors from harassing you and after your debts are discharged, creditors who still continue to collect from may be considered in contempt of court.  The automatic stay could also stop evictions, foreclosures (temporary), and disconnection of utility services.

6. Keep All Your Wages

If your wages were being garnished because of a judgment from a debt collection lawsuit, the garnishment will stop after you file for bankruptcy. You can start getting 100% of your wages from then on which could be a significant source of relief.

7. You may be Able to Keep Exempt Property

Depending on the state you live in, it may be possible for you to still keep some of your property as they could be exempt from bankruptcy. You have to check with your state to see what is considered exempt. You will also get to keep assets that do not cost a significant amount or that take too long to sell so you may be able to keep your clothes, bags, and other personal belongings.

8. You Can Start Rebuilding Your Credit

Many people have the misconception that after filing for a Chapter 7 bankruptcy, then they will never be able to get a new line of credit. However, there are now lenders who offer credit specifically to people who just came out of bankruptcy. Since all your debts are erased, there are companies that may consider you a good risk because you are more likely to pay.

9. No Debt Limit

There is no ceiling or maximum amount of debt that can be discharged in a Chapter 7 bankruptcy. If you as an individual or business qualify to file for a Chapter 7 bankruptcy, you can have all of your debt discharged whatever the amount.

Disadvantages of Filing Chapter 7 Bankruptcy

If you do not qualify for a Chapter 7 bankruptcy because of your income level, you may still be able to file for a Chapter 13 bankruptcy. This type of bankruptcy is mostly known as a reorganization of debt rather than totally discharging or erasing your debt. While some people may think that the repayment plan is not beneficial for them, there are some advantages associated with a Chapter 13 bankruptcy. Of course, there are also disadvantages of filing bankruptcy under chapter 13.

1. Income-Level Qualification

In order to qualify for a Chapter 7 bankruptcy, you have to pass the bankruptcy means test. This means that your monthly income must be below the median family income in the state you are living in. It may be possible to still file for a Chapter 7 bankruptcy if your income is higher than the median level but you have to prove your inability to pay your creditors. For example, if your expenses exceed your income and there is no money left after paying all your bills.

2. You’ll Lose Most of Your Valuable Assets

When you file for a Chapter 7 bankruptcy, you have to list down everything you own which will go into a bankruptcy estate and there will be a person appointed as a bankruptcy trustee who will decide to sell your assets to pay the creditors. So, what assets will a trustee sell? A trustee will sell assets that are non-exempt and can easily be sold for a significant amount of money. 

Exempt property will vary from state to state so you have to check what property or assets are exempt according to your state’s laws.

If you have a mortgage or a car loan, your responsibility to pay these debts will be wiped out but you won’t get to keep your house or car. So if there is a lien on your house, the lender could still repossess the house. Other assets that trustees may seize are expensive electronics, jewelry, fancy furniture, valuable paintings, new cars, real estate, stock portfolio, interest in businesses, and even patents or intellectual property rights. A trustee may also take expensive animals like if you own a stable of horses or herds of cattle.

3. You Still Have to Pay Non-Dischargeable Debts

If you have types of debts that cannot be discharged by law such as child support, alimony, federal student loans, most types of taxes, government fines, personal injury debts, debts connected with fraud, court fines, criminal restitution, etc.

4. 10 Years on Your Credit Report

A Chapter 7 bankruptcy will stay in your credit report for ten long years. You cannot get a bankruptcy off your credit report early. This means that it could affect your ability to acquire new credit in the next 10 years. Of course, you can still start rebuilding your credit but it may not be possible to get approved for favorable loans or a new mortgage. If you rebuild your credit and make timely payments, it is possible for the bankruptcy to stop affecting you after 4 or 5 years.

5. You Will Lose Your Credit Cards

After a Chapter 7 bankruptcy, you have to give up all of your credit cards. For the months after your debt is discharged, the only credit cards you may be able to get are secured credit cards where you have to put a deposit.

6. High-Interest when Applying for New Credit

Lenders who may be willing to loan you money or sell you a car will offer sky-high interest rates. You will not be able to get the same deal they would offer someone with good credit.

7. It Will Take Eight Years to File Again

If you fall into a deeper debt situation in a few years after filing for a Chapter 7 bankruptcy, you cannot file for another Chapter 7 bankruptcy within the next eight years. While it may be possible for you for Chapter 13 if you qualify.

Pros and Cons of Chapter 13 Bankruptcy

If you do not qualify for a Chapter 7 bankruptcy because of your income level, you may still be able to file for a Chapter 13 bankruptcy. This type of bankruptcy is mostly known as a reorganization of debt rather than totally discharging or erasing your debt. While some people may think that the repayment plan is not beneficial for them, there are some advantages associated with a Chapter 13 bankruptcy. Of course, there are also disadvantages of filing bankruptcy under chapter 13.

Advantages of Filing Chapter 13 Bankruptcy
Disadvantages of Filing Chapter 13 Bankruptcy

Advantages of Filing Chapter 13 Bankruptcy

1. More Time to Pay Your Debts

As mentioned, a Chapter 13 bankruptcy is a repayment plan where your debts are reorganized which will give you the ability to pay your debt over a three to five year period. This means that your debts stop being immediate anymore and it can give you some relief.

2. You Can Keep Your Property

One of the primary advantages of a Chapter 13 bankruptcy is you get to keep your property like your house or car. The repayment plan allows you to catch up on your payments without the threat of foreclosure or repossession, as long as you meet the required payments. This is advantageous for people who would rather not lose their property and prefer to keep paying.

3. Your Debts may be Reduced

In the repayment plan, it’s possible that the amount of your debt could be lowered. It may also be possible to discharge your unsecured debt after the repayment period.

4. Stop Creditors From Harassing You

A Chapter 13 bankruptcy filing also gives you relief from being harassed by debt collectors. If this is what’s causing most of your stress, you can solve this with a Chapter 13 bankruptcy.

5. Co-Signers Become Safe From Creditors

If someone cosigned your debt, they will be protected from creditors when you file for a Chapter 13 bankruptcy. This is a great advantage especially if you don’t want to burden your cosigners anymore by debt collectors.

Disadvantages of Filing Chapter 13 Bankruptcy

1. You Still have to Pay Your Debts

A Chapter 13 bankruptcy does not erase all your dischargeable debts immediately like a Chapter 7 bankruptcy. This is one disadvantage that pushes many people to file for a Chapter 7 bankruptcy, especially if they don’t really care about losing their mortgage, their car, or if they don’t really have any valuable property to lose. While a Chapter 13 bankruptcy will definitely relieve some pressure off you, you still have to make sure that you’ll be able to meet the obligations of the repayment plan.

2. 3 to 5 Years Process

Unlike a Chapter 7 bankruptcy that can be over in as little as three months, a Chapter 13 bankruptcy can drag on for three to five years. While creditors will stop hounding you, it’s possible to still feel some kind of stress as you need to make the required payments.

3. Limited Amount of Debt

With a Chapter 13 bankruptcy, there is a limit to the amount of debt that you can reorganize. This amount is revised every three years. The current limit in 2020 is $1,257,850 for secured debts (car, mortgage, etc.) and $419,275 for unsecured debts (credit cards, medical bills, etc.). If your debts are more than these limits, then you may not qualify for a Chapter 13 bankruptcy.

4. 7 Years on Your Credit Report

A Chapter 13 bankruptcy stays on your credit report for 7 years. This is three years shorter than a Chapter 7 bankruptcy filing which stays on your credit report for 10 years. This could affect your ability to get new credit with favorable terms in the years following your Chapter 13 filing. However, you may still be able to get new credit from lenders who specialize in lending to people who filed for bankruptcy but these terms are not very ideal.

Should you file for Chapter 7 or Chapter 13 bankruptcy?

The choice between filing for a Chapter 7 or a Chapter 13 will depend on your individual financial situation. You have to evaluate what will be better for you in the long run. Always keep in mind that bankruptcy should be your last resort. You have to exhaust all other options that could help you get back to a better financial situation. 

1 thought on “The Pros And Cons Of Filing Bankruptcy – Don’t Start Without Reading This First!”

  1. It was helpful when you mentioned that one of the advantages of chapter 13 bankruptcy is that it could actually lower the amount of debt you have. This seems like this could be a good idea for a family that is having a hard time making payments on things like a car loan and a mortgage. Of course, it would probably be a good idea to consult with a lawyer before you declare any type of bankruptcy.

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