Is Filing Bankruptcy Bad?
In almost all of the conversations I have with people about bankruptcy, the overriding sentiment is that the bankruptcy process is a bad and embarrassing thing, and should only be an option when someone has hit rockbottom. When you speak with people who have obtained their bankruptcy discharge, they are likely to share that the bankruptcy proceedings weren’t that bad, and that they were able to rebuild and use credit after bankruptcy. So, is filing bankruptcy bad? We’ll look at how some pros and cons of bankruptcy that may help you decide whether you should file for bankruptcy.
Bankruptcy is a legal proceeding that allows individuals to discharge their debts. What the discharge means is that creditors cannot take any enforcement action against you, the debtor, to collect that debt. The discharge applies to both unsecured debts, such as credit card debt and medical bills, as well as to secured debt, like a mortgage or auto loan. The effect is that for unsecured debts, those debts are basically eliminated; whereas for secured debts, the creditor cannot try to collect the debt against the debtor, but they still may be able to enforce any rights they have against the property (such as to continue a foreclosure case or repossess a vehicle).
Additionally, there are different types of bankruptcies, and the type of bankruptcy that you file impacts how the case works. Chapter 13 bankruptcy cases involve repayment plans with a monthly payment to a chapter 13 trustee, while a chapter 7 case is a liquidation bankruptcy, and chapter 11 refers to a reorganization bankruptcy.
Negative Effects of Filing for Bankruptcy
Although deciding that something is bad or good for you is more of a judgment call, many people have the idea that filing bankruptcy is a bad financial decision. This idea probably comes from hearing about negative effects of bankruptcy, which we can look at here.
Impact on credit score
Filing for bankruptcy may have a significant impact on your credit score. A bankruptcy filing can stay on your credit report for up to 10 years. Many bankruptcy filers have reported, however, that they have received offers for new credit card accounts even before their personal bankruptcy case is over. Additionally, some mortgage loan products don’t even consider a bankruptcy case after 2 years.
Loss of assets
Particularly in a Chapter 7 bankruptcy, personal assets may be sold to pay off debts. This can include personal property, such as a home, car, or even financial assets like funds in bank accounts or a personal injury claim. This is because in bankruptcy, you have to declare and claim bankruptcy exemptions with respect to your property. In a chapter 7 case, you are allowed to keep exempt property, while a bankruptcy trustee will seek to marshal and liquidate nonexempt assets to pay unsecured creditors.
Public record of bankruptcy
Like almost any other legal matter, bankruptcy filings are public record, which means that anyone can access this information. Sometimes on applications, possibly for a license or for immigration purposes, there may be a question asking if you have filed bankruptcy. It’s important to respond to questions like these truthfully because a party may be able to search since bankruptcy filings are public record.
Appearance in Court
Many people are concerned about filing bankruptcy because they have never stepped foot inside of nor have experienced a courtroom. When you file bankruptcy, there is generally at least one time you will have to appear in connection with your case, known as the Meeting of Creditors.
Positive Aspects of Filing for Bankruptcy
As mentioned before, whether filing for bankruptcy is good or bad is more of a judgment call. We discussed some of the negative impacts of filing bankruptcy, so now we’ll look at some of the positive aspects of filing for bankruptcy.
Automatic Stay
Probably one of the greatest benefits of filing for bankruptcy would be experiencing the benefit of the automatic stay. The automatic stay goes into effect immediately when the bankruptcy petition is filed, and provides immediate relief from debt collection and enforcement. This can be really powerful to stop events including wage garnishments, constant contacts from collection agencies, as well as other legal action.
Discharge of Debt
The order of discharge, entered at the end of your bankruptcy case, is a form of permanent relief from creditors. It permanently prohibits creditors from attempting to collect or otherwise enforce a debt against you. Effectively, this means that a creditor cannot try and collect that debt in the future that existed when your bankruptcy paperwork was filed. This applies to all types of debts, including personal loans, debt consolidation loans, medical debt, credit card bills, and more. The bankruptcy laws also provide that if a creditor does attempt to collect on a discharged debt, that you can then sue them in bankruptcy court for violation of the bankruptcy discharge.
Potentially Faster Financial Future Fresh Start
Another potentially positive aspect of filing for bankruptcy would be a possible fast recovery from financial burdens. While people can overcome financial trouble by possibly budgeting better or working on financial management skills, these options can often take years to build, and often come with lifestyle changes. A bankruptcy case, on the other hand, is relatively quick – about 4 months for a chapter 7 case, from the time of filing until the time the discharge order is entered. Many people are able to experience a financial fresh start immediately upon filing their bankruptcy case without having to change their lifestyle or budget.
Possibility to Discharge Student Loans
Another positive aspect of a bankruptcy filing is the potential to discharge student loans. Although in the past, it has been very challenging to discharge student loans in a bankruptcy case, recent updated guidance from the US Department of Education seeks to make it simpler and clearer for people seeking to discharge student loans in a bankruptcy case.
Conclusion
Because of the serious nature of a bankruptcy filing, many people associate filing for bankruptcy as a bad thing. There may be negative impacts from filing a bankruptcy case, including impact on credit score, possible loss of assets, a public record of bankruptcy filing, and having to appear in court. There are also a number of positive aspects to filing for bankruptcy, including the powerful automatic stay and discharge of debt, potentially realizing a financial fresh start compared to other strategies, and the possibility to discharge student loans.
The way a bankruptcy case works is different for everyone. What is “bad” for one person may be good to another, so it’s important to speak with a bankruptcy attorney, like the Law Office of Richard Kistnen, as early in the process as possible. Not only would speaking with a bankruptcy lawyer help to understand the negative and positive aspects of bankruptcy as it applies in your specific situation, but you could also discover how some alternatives to bankruptcy (like credit counseling, debt settlement, or a debt management plan) may work in your situation. To book your confidential, no-obligation bankruptcy consultation, just call (718) 738-2324 or click this link to schedule your appointment right now.