Dealing with thousands of dollars in debt can feel like a hopeless situation. Fortunately, several options are available to help you get it under control, including bankruptcy.
However, filing for bankruptcy isn’t a quick fix for your debt problems. Therefore, it’s essential to understand the pros and cons of bankruptcy so you can make an informed decision. Read on to learn what bankruptcy involves and whether it’s the right choice for your situation.
What Is Bankruptcy?
If you’ve been struggling with debt, bankruptcy is probably one option that you’ve heard about. But what does the bankruptcy process involve, exactly?
Bankruptcy is a legal process that helps you get a fresh start when a financial hardship prevents you from paying back your debts as originally agreed. Depending on your situation, that will involve completely wiping out some or all of your debt or working out a new payment plan that makes payments much more manageable.
There are a few common types of bankruptcy for consumers.
- Chapter 7: Also known as liquidation bankruptcy, Chapter 7 bankruptcy involves selling off your assets to pay back your creditors. Any leftover unsecured debt is usually forgiven, such as credit cards or medical bills. Some debts, however, are much harder to get wiped out with bankruptcy, including student loans and taxes. Chapter 7 bankruptcy is reserved for people who don’t earn enough income to pay back their debts, as determined by the court.
- Chapter 11: While just about anyone can file for chapter 11 bankruptcy, it’s considered one of the more complex and expensive options. That’s why it’s more common for businesses to opt for this type. Chapter 11 allows your business to continue operating while your debts are reorganized.
- Chapter 13: With this type of bankruptcy, your debts are also reorganized so that you can more easily handle the monthly payments. The court comes up with a payment plan that allows you to pay off most or all of your debt in three to five years. This option is designed for borrowers with stable incomes and allows you to keep your assets, but the court will put you on a strict budget and check up on your spending.
What Are the Biggest Bankruptcy Pros and Cons?
Filing for bankruptcy is a major decision that shouldn’t be taken lightly. If you’re considering it, be sure you understand the pros and cons of filing bankruptcy first.
Pros of Filing for Bankruptcy
Keep in mind that bankruptcy is usually considered a last resort. Still, in the right circumstances, there can be some advantages to filing:
- A fresh start. This is, of course, the most compelling reason to file for bankruptcy. Whether you have the slate wiped clean immediately, or get set up with a plan that leads to being debt-free in a few years, it feels good to have that burden off your shoulders.
- Cash flow to fund your goals. Bankruptcy is a clear-cut path to eliminating debt fairly quickly. So once the hard part is over, you can stop funneling your hard-earned money toward payments and interest charges and start focusing on your financial goals. Maybe that’s going back to school, catching up on retirement savings or finally going on that dream vacation.
- Peace of mind. If you’re in a position where filing bankruptcy is necessary, you’re probably very delinquent on your payments. Meaning you probably hear from debt collection agencies on a regular basis. However, as soon as you file for bankruptcy, an “automatic stay” is put in place, which prohibits collectors from contacting you. No more uncomfortable phone calls or threats of a lawsuit.
Cons of Filing for Bankruptcy
So what is the downside of filing for bankruptcy? There are some pretty major consequences:
- Your credit will suffer. One of the biggest downsides of bankruptcy is that it causes your credit score to take a big hit. Plus, it stays on your credit report for up to 10 years. That can make it tough to borrow money in the future, as well as rent an apartment, open a utility account or even get certain types of jobs. Fortunately, the impact of bankruptcy on your credit decreases with time.
- It’s expensive. Though the end goal of a bankruptcy filing is to rid yourself of burdensome debt, the process can cost a lot in the short-term. In fact, you can expect to spend between $1,500 and $4,000 in bankruptcy attorney and court filing fees. However, if you can’t afford the fees, you may qualify for legal aid.
- You might lose your possessions. In the case of Chapter 7 bankruptcy, your assets are liquidated in order to come up with the cash to pay back creditors. That means you may have to give up bank accounts, vehicles, real estate, valuables, etc.
- Not all debts can be discharged. Even if you qualify for a liquidation bankruptcy, you won’t necessarily get off scot-free. Student loans, for example, are notoriously difficult to have discharged due to an additional undue hardship test. Certain other types of debt are also rarely discharged, including back child support payments, alimony and tax debt.
If you’re struggling to manage your debt, it may be helpful to speak with a lawyer who can walk you through your options, including bankruptcy. Here at Tayne Law Group, we’re experts in helping people get out of debt. Call us at (866) 890-7337 or fill out our short contact form to get a free consultation and find out which options may work for you.