Pros and Cons of Bankruptcy

Pros And Cons Of Bankruptcy

Most people do not know that there are alternatives, like debt settlement, to resolving your debt outside of bankruptcy.  Therefore, most people file bankruptcy without knowing all of the pros and cons of their decision.  It is very important to examine such things when deciding if bankruptcy is right for you.  Although each debtor has very individualized facts, some basic pros and cons are stated below:

CONS

1. You will be required to list all of your creditors in the bankruptcy and will lose the use all of your credit cards.  You can not pick and choose.
2. If you have any monies owed to you, they will now be the owed to the trustee.
3. There are strict guidelines in place with FHA and conventional mortgages on how long you have to wait after bankruptcy before you are able to get a loan.
4. Bankruptcies stay on your credit report for 10 years.
5. There is a very large impact on your credit.
6. Bankruptcies are public record.
7. For certain careers, employers ask if you have filed bankruptcy on your job application.
8. If you have an LLC and the trustee values your LLC at a dollar amount worth the trustee taking, your LLC will be auctioned off.
9. Each state has certain rules that are in place to limit the dollar amount of assets you can have and keep when filing bankruptcy.  These rules limit the amount of equity you can have in your home, your car, your jewelry, your tools of trade,  your bank accounts, etc. If you are outside of these dollar values for your state, those items are in danger of being taken by the trustee to auction to pay your creditors.
10. In order to qualify for Chapter 7 bankruptcy you, you must make below a certain income to qualify which is based on your state’s median income for the number of dependents in their household.
11. If you file Chapter 13 bankruptcy, you will be making a monthly payment to the trustee for 3-5 years and if you make more money over that time period, the trustee will simply take more money from you. You have no incentive to move forward with your life.
12. Although Chapter 11 bankruptcy is available to individuals, it can be quite pricey as the range that most attorneys charge for a Chapter 11 is $10k-$25k typically.
13. Not all debts are dischargeable – such as student loan debt (whether federal or private), alimony, child support and tax debt that is not over three years old.
14. Chapter 13 limits the amount of debt you can bankrupt.

PROS

1. Chapter 7 bankruptcy is a “fresh start” bankruptcy which means that if you do not have any assets, you can erase all of your unsecured debt for the low cost of paying your bankruptcy attorney and the court filing fee.
2. Once you file bankruptcy, a stay order is issued by the court to your creditors telling your creditors to stop all collection efforts so that they can no longer hound you for payment via phone or mail.
3. In a Chapter 13 you may be able to lien strip a second mortgage off of your home or cram your mortgage down to the current value of your home.
4. There are no tax consequences for forgiven debt.
5. There are state exemptions that allow for you to not end up homeless or carless so you can still maintain a life.
6. Chapter 7 bankruptcy is a fairly quick process so that you can start to work on rebuilding your credit quickly.

There are many pros and cons to examine based on your individualized facts but the aforementioned is a good start to help you make sure you examine all your options before jumping right into bankruptcy.