As with most financial decisions, making the decision to file bankruptcy brings both pros and cons. Understanding these is the first step in making the right decision for your finances. Remember, the right decision for you might not be the same for someone else with similar circumstances. When it comes to filing bankruptcy, there is rarely a one-size-fits-all solution.
Pros
The pros of bankruptcy are sometimes obvious. For instance, when you file, you may find yourself with the ability to discharge a great number of your debts. Unsecured debts in most cases are dischargeable. However, liens and collateral on secured debts can be taken, and some debts, like those owed to the government, cannot be discharged in most instances.
Bankruptcy also provides some protection for the debtor. When you have the protection of bankruptcy court, you will not risk losing your assets to your creditors. Unsecured creditors may come after some of your assets and even your wages in an attempt to get what you owe. The automatic stay and then your bankruptcy protection prevent this from happening. This can add further protection by helping you protect your job if your employer is not willing to work with wage garnishment.
The automatic stay is another pro for those filing for bankruptcy. This prohibits all collection attempts by creditors while the bankruptcy is in process. This can stop repossession, foreclosure, utility shutoffs, and other collection actions that could greatly disrupt your life. This can take much of the pressure off of the debtor while trying to sort out his or her financial situation.
Cons
Of course, bankruptcy is not a magical solution to debt by any stretch of the imagination. There are some serious consequences if you choose to file. For instance, if you choose to file Chapter 7, you can stand to lose much of your property. All states have exemptions, but nonexempt property can be used to repay creditors. If you own your own home and have equity in it, or have a valuable vehicle, these could be at risk.
The biggest con, of course, is the hit your credit will take. This can be weighed against the hit your credit has probably already taken because of your own financial problems, and the impact is not permanent, but it can be substantial. However, some creditors view a bankruptcy as an improvement because it wipes the slate clean for the debtor and frees up funds. So, for some types of creditors, you may still be able to get credit or loans after filing.
There is a cost factor to consider as well. In addition to the mandatory fees imposed by the government, you may choose to hire an attorney, and that will cost more as well.
Finally, there is the debtor’s reputation that is at stake. While this is not a legal or financial problem, it can be frustrating for a debtor to feel like others view him differently after filing bankruptcy. Again, this will be something that each debtor has to come to grips with, and the benefits may outweigh any potential embarrassment they could face.
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