The Pros and Cons of Filing for Bankruptcy
Filing for bankruptcy is a debt solution for those who have no means to repay their creditors or whose total debts are more than the value of their assets.
Chapter 7 bankruptcy is the most common type of personal bankruptcy available in the United States. Under Chapter 7, you can eliminate unsecured debts—and some secured debts— by surrendering your assets.
Bankruptcy is a difficult decision to make. It can provide a fresh financial start, but there are also serious consequences to consider. Before determining that bankruptcy is the right solution for you, it’s important to weigh the pros and cons. In this article, we’ll look at the advantages and disadvantages of filing for Chapter 7 bankruptcy.
The Pros of Bankruptcy
Permanent debt relief: Bankruptcy wipes the slate clean. Most debts, including credit cards, medical bills, and personal loans, will be eradicated when you are granted a bankruptcy discharge.
Reduces stress: Debt can be overwhelming and stressful. One of the main advantages of filing for Chapter 7 bankruptcy is the peace of mind that comes with eliminating debt. Collection procedures cease when you file for bankruptcy, which will reduce tension and lead to better mental well-being.
Opportunity to rebuild your credit: Bankruptcy gives you a fresh start and a chance to rebuild your credit—but we won’t pretend that this doesn’t involve hard work, or that it doesn’t harm your credit status in the short term.
Monitoring your credit report, saving for emergencies, and staying on top of household bills are all practical steps to help you improve your credit score within a few years of bankruptcy.
You can keep essential items: You will not have to give up all your possessions if you opt for bankruptcy. The court will apply a trustee to review your situation and liquidate high-value items such as property and cars to repay the debts, but basic household furnishings and work-related items such as tools may be exempt.
The Cons of Bankruptcy
Not all debt will be forgiven: Chapter 7 bankruptcy can eradicate most debt, but certain debts will still stand. These include court-ordered alimony or child support, most student loans, and government fines or penalties.
Future issues with borrowing: Rebuilding your credit is important, and you can apply for credit cards to help improve your credit. But because your bankruptcy filing is a public record, anyone can request to view it, which means you may be targeted by lenders who offer credit cards with high interest rates.
Getting a mortgage may be difficult: Lenders may decline future mortgage applications—and if they do accept, they may ask for a larger down payment and offer you higher interest rates and increased fees.
You can only file for Chapter 7 bankruptcy every 6 years: If, after filing for bankruptcy, you find yourself with further financial challenges, you’ll be unable to file another Chapter 7 claim for 6 years from the date of the previous file.
Alternatives to bankruptcy
When faced with unmanageable debt, it may seem like bankruptcy is the most practical option, but other solutions should be considered. Some alternatives will allow you to keep your home. The Homestead Exemption is one such legal provision that protects your home from some creditors following a declaration of bankruptcy. The exemption applies to most states although there are varying degrees of protection across the country. Check to see what level of protection your state affords.
Speaking with a professional debt counselor who can offer viable alternatives is a great first step. It may be that a debt management program, which consolidates multiple high-interest debts into a single monthly payment, could make more financial sense.
If you would like to discuss your finance options with the trained debt counselors at Effective Debt Relief, call our team at 800-940-5449, or visit us online. We’ve helped almost 30,000 people find practical solutions to achieve relief from the stress that financial challenges can bring, eliminate their debt, and enjoy a more secure financial future.