Advantages and Disadvantages o Bankruptcy

Declaring bankruptcy allows individuals or businesses that are unable to pay their debts to resolve their financial difficulties and start rebuilding their credit. Filing for bankruptcy has many advantages and disadvantages, depending on your situation.

What are the Disadvantages of Filing for Bankruptcy?

Because filing for bankruptcy may affect your finances for many years, you should carefully weigh all of your options before filing. Some disadvantages are:

• If you are unable to exempt all of your personal property or real estate under the bankruptcy exemptions, some of your property may be seized by the bankruptcy court and sold to pay your creditors.
• Your bankruptcy will be noted on your credit report for 7-10 years.
• Many credit card companies will automatically cancel your credit cards when you file for bankruptcy. You will have difficulty getting new credit cards or lines of credit.
• A recent bankruptcy filing may hinder your ability to obtain a mortgage or loan for many years.
• Tax refunds from governments may be denied based on your bankruptcy.
• If you are looking for a job or housing, some employers or landlords may look unfavorably on a recent bankruptcy filing.
• You may be precluded from being named a director for limited liability companies.
• After your bankruptcy, some debts, such as student loans, many types of tax debts, liens, support orders (such as child support and alimony), taxes or fines may be non-dischargeable.
• If you file bankruptcy, you will need to wait if you want to file again some years. Therefore, if more financial difficulties pile up, you will be precluded from filing for bankruptcy again for some time.
• It can drive up your insurance premiums.
• It can impact a search for employment, since some potential employers run credit checks on candidates for employment.
• Bankruptcy can be embarrassing.

While the last point might seem trivial compared to the other disadvantages, bankruptcy carries a serious stigma, and personal bankruptcy more so. However, it’s important to not let yourself avoid the benefits of bankruptcy (as seen below) just so you can also avoid embarrassment.

What are the Advantages to Filing for Bankruptcy?

Despite its disadvantages, in many cases, filing for bankruptcy is the correct course of action. The advantages of filing for bankruptcy are:

• Filing for bankruptcy will trigger the automatic stay, preventing creditors from taking action to collect their debts, prevent creditors from repossessing property such as cars, including calling you, suing you, or sending you letters. This also puts a stop to many evictions, foreclosures, wage garnishments and utility shutoffs.
• You may be able to discharge your obligation to repay any of your dischargeable debts. By using the bankruptcy exemptions, many debtors can go through the bankruptcy process without losing any of their property.
• While a bankruptcy filing will remain on your record for 7-10 years, because many debts can be discharged in bankruptcy, many debtors begin improving their credit rating after filing for bankruptcy.
• Without credit, you can learn to live within your income and prevent future financial catastrophes.

Debtors declaring personal bankruptcy are required to take credit counselling. Therefore, you’ll have wherewithal to guide you as you rebuild your credit and learn new financial habits.