Filing for bankruptcy is a drastic step in regaining your financial health, and the impacts are long-lasting. It is not something to be done lightly, or without weighing out all of your available options. If you are drowning in debt, however, bankruptcy can be a valuable first step in rebuilding your financial future.
GetFreeOfBills.com notes that bankruptcy comes in two forms: Chapter 7 and Chapter 13. While Chapter 7 allows you to discharge most debts, Chapter 13 requires you to follow a structured plan to repay your debts under more favorable terms. Depending on the amount of disposable income you have, you might be required to file Chapter 13. Regardless of which type you file, however, the pros and cons are generally the same.
Pros
- Clean slate: A bankruptcy provides a clean slate. It effectively resets your credit to zero, except for the debts that cannot be discharged such as student loans, recent back taxes, and child support. It provides you with the opportunity to stop making costly payments and provides you with more money to live on each month.
- Opportunity to rebuild: Some people believe that bankruptcy prevents you from ever having credit again, but this is not the case. Many people manage to build new lines of credit shortly after their bankruptcy, and it gets easier as time passes. While it is true that bankruptcy remains on your credit report for 10 years, its effects gradually lessen.
- Stopping adverse collections actions: If you are being hounded by creditors, facing foreclosure, or afraid that your wages will be garnished, bankruptcy can be a psychological relief. When you file for bankruptcy, you will receive an automatic stay from the court. This forces your creditors to cease all adverse collections activities against you. If you have a bankruptcy attorney, he or she will also act as a shield, handling creditors on your behalf.
- Exemption laws: Your home and car are generally exempt from bankruptcy, as long as you continue to meet your payment obligations. You are also entitled to a cash value for personal possessions. If you have a significant number of luxury possessions, you might be required to sell some, but the exemptions are generally high enough to let most people keep their personal items.
- Job protection: Although some employers will not hire applicants with a bankruptcy on their credit report, the job you already have is protected. It is illegal for an employee to be fired for declaring bankruptcy.
Cons
- Damaged credit: Bankruptcy is a major hit on your credit report. In the immediate aftermath of the bankruptcy, you might be unable to get any new credit at all. Although it usually does not take long to get new offers, you will fall into a high risk category for lenders. Expect to pay interest rates that are significantly higher than the ones you had prior to your bankruptcy. However, if you are in the position of filing for bankruptcy, your credit is probably already damaged. Some people find that the credit hit is much less significant than they anticipated.
- Filing costs: Filing for bankruptcy typically costs a few hundred dollars, depending on your location. Attorney’s fees are billed on top of that. However, in most cases you can make a payment arrangement if you can prove that paying a lump sum would present a financial hardship.
- Embarrassment: Although it is surprisingly common, filing for bankruptcy still carries a certain stigma. Some people worry that their loved ones will find out and ultimately think less of them for their decision. However, bankruptcy typically comes at the end of a long journey through mounting debt. Most people understand that sometimes life happens, and do not judge their friends and relatives for making a tough financial decision. Besides, having your home foreclosed or your car repossessed is not exactly a less embarrassing option. When taken seriously and only as a last resort, bankruptcy can actually be the smartest choice for some situations.
- Exempted debts: Some debts cannot be discharged in a bankruptcy, including recent back taxes, child support, and student loans. In addition, most people choose to keep their mortgage and car loan, if applicable. However, discharging your other debts will create more available money each month, which can then be diverted toward paying your remaining obligations.
Bankruptcy is not for everyone, but it is the best solution for many people. Attorney David M. Often of Get Free of Bills understands the complex decision-making process that is involved in determining whether bankruptcy is the right choice for you. Contact his office today for professional advice on how to proceed along your journey to financial freedom.
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