Bankruptcy is designed to provide you with a fresh start when you’re overwhelmed by debt. While it can be a valuable way to resolve financial difficulties, you should understand both the advantages and disadvantages before deciding to file for bankruptcy.
Pros of Bankruptcy
- Debt discharge. One of the primary benefits of bankruptcy is the potential to have your debts discharged or eliminated. Depending on what type of bankruptcy you file, you can potentially wipe out certain debts—including credit card balances and medical bills—and get a chance to rebuild your financial life without the burden of overwhelming debt.
- Automatic stay. When you file for bankruptcy, an automatic stay goes into effect, halting all collection actions by creditors. This automatic stay requires creditors to stop pursuing you for payment—no more harassing phone calls or letters, wage garnishment, or lawsuits, and no foreclosures. You get immediate relief and the chance to focus on the bankruptcy process.
- Fresh start. Bankruptcy provides an opportunity for a fresh start with your finances. Once your debts are discharged, you can take steps to improve your credit score, such as paying bills on time and reducing your debt-to-income ratio. In this way, you can begin to rebuild your credit and financial life.
- Asset protection. Depending on the type of bankruptcy you file, you may be able to protect certain assets from liquidation. For example, under Chapter 7 bankruptcy, certain exemptions allow you to keep essential possessions like your home, car, and necessary personal belongings. This can help you keep the things that are most important to you.
- Debt repayment plans. If you make a regular income, Chapter 13 bankruptcy lets you create a debt repayment plan to repay your debts over a period of three to five years. This can provide an easier way to manage debt while keeping valuable assets.
Cons of Bankruptcy
- Credit impact. Bankruptcy impacts your credit score significantly and remains on your credit report for up to 10 years. This can make it difficult to get new credit like loans or credit cards, and may result in higher interest rates or stricter borrowing terms when you do get approved.
- Public record. Your bankruptcy is in the public record, so anyone can access information about your filing. There’s still a stigma attached to bankruptcy, and some people may view you differently if they find out you have filed. Depending on your tolerance, this stigma and lack of privacy can be potentially uncomfortable.
- Limited access to credit. Even after your bankruptcy is discharged, it may take a while to rebuild your credit record. During this period, you may have limited access to credit, or you may be only offered credit at high interest rates, which can impact your ability to finance major purchases or secure favorable terms.
- Loss of assets. In some cases, particularly under Chapter 7 bankruptcy, you may be required to liquidate certain assets to repay your creditors. While some essential possessions are protected, you may lose some non-exempt assets.
- Future loan and job application concerns. Some lenders and employers view bankruptcy as a negative factor when considering loan applications or job candidates. You should be aware that bankruptcy may affect your future financial and employment opportunities.<l/i>
- Emotional toll. Filing for bankruptcy can be emotionally draining. It can be difficult to face the fact that you are unable to pay your debts, and the process of filing can be overwhelming. You may also feel a sense of shame or embarrassment, which can take a toll on your mental health.
Make an informed decision
Bankruptcy can enable you or your businesses to overcome overwhelming debt and get a fresh start. It offers benefits like debt discharge, automatic stay, asset protection, and the opportunity to create debt repayment plans. But you should weigh these advantages against the potential drawbacks, like the impact on your credit, limited access to credit, public record, and possibility of being required to liquidate some assets. Before you decide on bankruptcy, you’d do best to consult with a qualified bankruptcy attorney to fully understand your options and the implications of filing for bankruptcy in your specific situation.
Get in Touch With Richard P. Arthur
Richard P. Arthur, Attorney at Law, can provide advice about which type of bankruptcy fits your specific financial situation. You can call 937-254-3738 for a consultation. He has more than three decades of experience helping clients in Dayton and Trotwood, as well as Montgomery, Greene, Miami, Clark, and Warren counties.