The Pros And Cons Of Filing For Personal Bankruptcy

Types of Personal Bankruptcy

There are two main types of personal bankruptcy: Chapter 7 bankruptcy and Chapter 13 bankruptcy. In Chapter 7 bankruptcy, your non-exempt assets are collected by a bankruptcy trustee and liquidated to pay back your debts. In Chapter 13 bankruptcy, you can keep most assets and pay back the money you owe over time using a structured debt repayment plan. Here’s a closer look at Chapter 7 bankruptcy and Chapter 13 bankruptcy, and the pros and the cons of each.

Chapter 7

After filing for Chapter 7 bankruptcy, you keep some assets and sell the rest to help pay back each creditor. Exempt assets you may be able to keep include your home, vehicle, college fund, and retirement fund. Each non-exempt asset will be collected by a bankruptcy trustee and sold.

With Chapter 7 bankruptcy, you can erase credit card debt, some taxes, debt from medical bills, debt from home loans, and debt from vehicle loans without owing a monthly payment. If you were a student and have debt from student loans, you may be able to renegotiate the terms of the student loans. You will, however, still be responsible for repaying the student loans as well as debts like child support, recent taxes, and under water second and third mortgages.

When you file Chapter 7 bankruptcy in federal court, an automatic stay is implemented on your existing debts, and creditors must stop collecting payments and are not allowed to harass you.

Chapter 13

Chapter 13 bankruptcy allows you to create a debt adjustment plan or debt repayment plan. After filing for bankruptcy, you will pay back a portion of the money you owe over a specific time span, and the rest of the debt will be eliminated. Chapter 13 bankruptcy is often chosen by people whose income is too high to quality for Chapter 7 bankruptcy. Chapter 13 bankruptcy can be a good option for individuals who have debt because they are behind on their car payments or house payments. If you were a student and have debt from student loans, you won’t be required to pay back the full amount of the student loans, only a portion of the loan. This can be helpful if you have large student loans.

Just like in Chapter 7 bankruptcy, after filing for Chapter 13 bankruptcy in federal court, an automatic stay goes into effect on your existing debts.

Who Can File Chapter 7 or 13 Bankruptcy?

Bankruptcy eligibility criteria differ between Chapter 7 bankruptcy and Chapter 13 bankruptcy. In both Chapter 7 bankruptcy and Chapter 13 bankruptcy, you’ll need to file forms in federal bankruptcy court that contain information about your property, cash income, tax returns, creditors, credit cards, student loans, exemptions, and more, as well as documents like loan statements, statements from bank accounts, and other information about your loans and debts. You’ll also have to attend a credit counseling session.

To qualify for Chapter 7 bankruptcy, you must have a household gross income below the median income. To qualify for Chapter 13 bankruptcy, you must have a reliable source of income and be able to stick to a debt payment plan. If your income is too high to qualify for Chapter 7 bankruptcy, you may choose Chapter 13 bankruptcy. Even if you do qualify for Chapter 7, you may opt to file Chapter 13 bankruptcy instead.

A bankruptcy attorney can help determine if you qualify for bankruptcy, and if you do, which type of bankruptcy is the best based on your specific debts and unique circumstances.

 

Pros of Filing: The Advantages of Bankruptcy

There are many advantages to filing bankruptcy. Depending on the type of bankruptcy you file in bankruptcy court, you may be able to discharge some or all of your debt, as well as make creditors stop their debt collection efforts. Bankruptcy laws also offer a variety of protections, and filing for bankruptcy can give you a fresh start.

Debt Discharge

The possibility of completely discharging your debts is part of the appeal of Chapter 7 bankruptcy. Of course, it depends on the specific types of debts and loans you have. With Chapter 7 bankruptcy, you can typically wipe out debt from credit cards, debt from medical bills, debt from your home, debt from your vehicle, and debt from some unpaid taxes.

With Chapter 13 bankruptcy, you may not be able to wipe out all of your debt, but depending on how your debt repayment plan is structured, you may only need to pay back a small fraction of your existing debt over time. This can make debt repayment more manageable.

If you are the sole proprietor of a business and you decide to file for personal bankruptcy, you may be able to discharge some business debts, too.

Immediate Debt Relief

When you file for bankruptcy with the court, an automatic stay goes into effect. This requires creditors to stop their debt collection efforts towards you, including harassing phone calls and letters. Wage garnishments, foreclosure, and repossession are also stopped. Automatic stays are one of the advantages of filing for bankruptcy, as they help return a sense of calm to your daily life.

Fresh Financial Start

Another advantage of bankruptcy is bankruptcy allows you to eliminate a significant amount of your credit card debt or loan debt, helping you gain a fresh start towards a healthier financial future. Through bankruptcy, you can begin rebuilding credit responsibly and make better informed decisions about credit cards, debt, loans, money management, and more. Chapter 7 bankruptcy and Chapter 13 bankruptcy also allow you to begin credit repair efforts to improve your credit score after you file for bankruptcy.

Protection Of Assets

Bankruptcy law includes exemptions that protect specific assets from liquidation, so you won’t lose them in the process of paying off your credit card debt or loan debt. In Chapter 7 bankruptcy, exempt assets may include your house, vehicle, retirement fund, and college fund. In Chapter 13 bankruptcy, you get to keep all of your assets and instead pay back your credit card debt or loan debt through monthly payments. The number of assets you have and their value can impact which type of personal bankruptcy is best for you, so be sure to discuss your options with an experienced lawyer before filing in bankruptcy court.

Structured Repayment Plan (Chapter 13)

If you choose to file for Chapter 13 bankruptcy, you pay back your debts using a monthly payment plan. These payments are typically made over the course of three to five years, making it easier to manage your credit card debt and loan debt and pay back your creditors without liquidating your assets. The amount and duration you will pay as part of the structured debt repayment plan depends on your assets, income, and expenses.    

Legal Protection

The automatic stay that takes place when you file for bankruptcy includes legal protection against lawsuits and creditor actions. During the stay, creditors are prohibited from continuing or initiating lawsuits.

Cons of Filing: The Disadvantages of Bankruptcy

While there are several pros to bankruptcy filing, there are also cons to consider. Some disadvantages of filing for bankruptcy include a negative impact on your credit score, limited access to credit and loans due to bad credit, and the need to liquidate any non-exempt asset. Bankruptcy is also public record and can contribute to potential employment issues. It’s important to discuss the pros and cons of bankruptcy before you file.

Negative Impact on Score

One of the downsides to personal bankruptcy is the impact it has on your credit score. Bankruptcy will show on your credit reports for up to 10 years once you file. This can hurt your credit score and make it difficult to secure new credit through credit cards, get a loan, or receive favorable interest rates on your credit cards or loans. You will need to put time and effort into a credit repair strategy to improve your credit score. Since insurance rates are typically based on your credit score, bankruptcy can also cause higher insurance rates, such as for car insurance or life insurance. While bankruptcy can hurt your credit, it is possible to improve your credit score.

Public Record

When you file bankruptcy, the filing becomes public record and is accessible to anyone who goes looking for that information. This lack of privacy about your debt may not be comfortable if you prefer to keep your financial affairs to yourself.

Limited Access to Credit

Obtaining credit and new credit cards following bankruptcy can be a challenge. If you are able to secure new credit through credit cards, the credit will likely come with high interest rates, as lenders may perceive an increased risk in giving you credit. Bankruptcy can also make it challenging to get a mortgage loan, auto loans, or other financing. It can take time, patience, and responsible financial behavior to rebuild your credit following bankruptcy.

Loss of Non-Exempt Assets

Depending on which chapter of personal bankruptcy you choose to file, you may be forced to lose non-exempt assets through liquidation, meaning they will be collected by a bankruptcy trustee and sold to pay back each creditor. In Chapter 7 bankruptcy, you may have to liquidate certain items with help from a bankruptcy trustee. Fortunately, in Chapter 13 bankruptcy, you all of your items are protected and you won’t have to sell them to pay back creditors.

Potential Employment Issues

Bankruptcy has the potential to impact future job opportunities and career advancement. While not every business will care, some employers may view the bankruptcy filing negatively.

Alternatives to Filing Bankruptcy

Personal bankruptcy isn’t the only debt relief solution available. While Chapter 7 bankruptcy and Chapter 13 bankruptcy can help you get out of debt, it’s important to consider all of your debt relief options, including bankruptcy alternatives like debt consolidation, credit counseling, debt settlement, negotiating with creditors, and refinancing your mortgage, and how those will impact your credit.

Debt Consolidation: Debt consolidation is the process of combining multiple debts into a single debt. This works by taking out a loan or opening a credit card to pay back the money you owe to different creditors. Then, you only have to focus on repaying the single loan or credit. Since you now have one large loan instead of multiple smaller debts, you may be able to secure more favorable terms, such as lower interest rates or reduced monthly payments. This can make debt management feel easier.

Credit Counseling: Credit counseling involves working with a professional to better understand debt management best practices. They can provide guidance on topics like creating a budget that’s realistic, how to negotiate with a creditor, how to be responsible with credit cards and loans, how to pay back student loans, how to improve your credit score, and more.

Negotiating with Creditors: Before considering bankruptcy, you can try negotiating with creditors, who may be willing to provide more favorable credit repayment terms. Be prepared to explain your financial situation, provide documentation that supports your claims, and ask if they offer a hardship program or alternative debt repayment options or resources.

Debt Settlement: If your financial situation is severe, you might consider negotiating a settlement with creditors, which would allow you to pay back less money than what you actually owe. While debt settlement will impact your credit score, it may be less drastic than filing for bankruptcy.

Refinance your mortgage: To refinance your mortgage, ask your lender if they can replace your existing mortgage with a new mortgage featuring more favorable terms, such as lower interest rates or a lower monthly payment.

When considering alternatives to bankruptcy, it’s helpful to talk to an experienced attorney who can explain the options available, how they will impact your credit score, and the other pros and cons of each alternative to bankruptcy.

Weigh the Pros and Cons With a Lawyer

Working with a bankruptcy lawyer is one of the best ways to learn more about personal bankruptcy, the pros and the cons of filing for bankruptcy, how it affects your credit, the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy, and alternatives to bankruptcy. A good lawyer will start by thoroughly assessing your financial situation. This includes taking a detailed inventory of your debts from credit cards, debts from loans, student loan debt, your income, and your expenses to determine how severe your financial situation is.

Then, the lawyer can offer personalized debt relief guidance based on your specific debts, goals, needs, and concerns. They’ll help you make informed decisions about your debts, credit score, and your financial future. You can also talk with a lawyer to weigh the benefits and consequences of bankruptcy, as well as each pro and con of Chapter 7 bankruptcy and Chapter 13 bankruptcy. The decision to file for bankruptcy should not be taken lightly, and a bankruptcy lawyer can help you understand how bankruptcy may impact your credit score and your life.

If you feel like you’re drowning in debt from credit cards, student loans, and other loans, personal bankruptcy may provide a lifeline. However, it’s important to understand the pros and the cons of bankruptcy and the impact that bankruptcies can have. We encourage you to seek professional advice from a lawyer and explore all your options before deciding.

Contact Jump Legal

If you’re considering filing for bankruptcy, contact Jump Legal. We’ll take the time to learn about your financial situation and provide personalized recommendations. If you decide that Chapter 7 bankruptcy or Chapter 13 bankruptcy is the best option, we can also help you start the filing process.

Mark Jump, founding partner, has more than two decades of experience helping people via cases regarding Chapter 7 bankruptcy, Chapter 13 bankruptcy, debt from credit cards, debt settlements, student loan debt, harassment from creditors, and more. Contact Jump Legal today to learn more and start on the path towards a stronger financial future without debt.