Is There a Downside to Filing Bankruptcy?
Weighing the Pros and Cons of Bankruptcy
Bankruptcy has emotional and financial disadvantages that you should be aware of before filing.
Yes, bankruptcy can carry a stigma. It signifies for many financial failure. However, the U.S. is a forgiving place that loves to see people rebound from setbacks. Your bankruptcy will be a temporary label that will soon be replaced by what you do with your financial life after bankruptcy.
Bankruptcy brings financial burdens. For several years after your filing, many financial transactions will be affected. Whether you are renting or buying a home, leasing or buying a car, borrowing for a business, or obtaining a credit card, your bankruptcy will make those transactions more difficult to complete.
However, as a result, you will learn to be more financially self-sufficient. You will learn to live without much credit, which is better than being up to your ears in debt. After a few years free of financial problems, lenders will again be ready to offer you credit.
When to File for Bankruptcy
Bankruptcy is not good or bad in and of itself. It accomplishes a specific thing and allows debtors to get themselves back on their feet. Many folks ask us: When is the best time to file for bankruptcy? The idea of treating bankruptcy as a last resort is a wise one, but if you wait too long to play that card, you could find yourself in financial peril.
At some point or another, a creditor will initiate a lawsuit against you. If they win that lawsuit, they can begin garnishing your wages, levying your bank account, and putting liens on your real estate. In some cases, they may begin liquidating your assets. In order to prevent this from happening, you can file for bankruptcy. This immediately terminates all creditor actions against you while your bankruptcy is being processed.
If you know you’re going to lose the lawsuit, the time to contact a bankruptcy attorney is sooner rather than later. Liens may not be discharged in bankruptcy and if the creditor attempts to garnish your wages, they will have to contact your employer and demand they set money aside from your check which would be embarrassing.
Your Credit Score Will Take a Hit
The truth of the matter is, by the time creditors are filing lawsuits against you, your credit score is already in the dumpster. It’s not going to get much worse after you file for bankruptcy. In rare situations, it may actually go up. In most situations, it will drop a little bit. For credit scores that are higher than 650, you might see a significant drop off with a bankruptcy now on your record. But you won’t have to worry about lawsuits from creditors, wage garnishments, bank levies, and liens on your property which is a significant plus.
In other words, if you’re facing creditor lawsuits, filing for bankruptcy will actually improve your credit in the long term. The financial hit you will take from aggressive collection techniques is far worse than temporary credit problems caused by a bankruptcy on your credit report.
Some of Your Debts May Not Be Discharged
This is true. When you file for Chapter 7, only your unsecured debts will be discharged. On the other hand, if you have any valuable assets, the bankruptcy trustee can seize them and liquidate them to repay your creditors. Most Chapter 7 filers don’t, however, due to the fact that, in order to qualify, you must make below the state median. Additionally, you are allowed to protect certain assets in bankruptcy from liquidation including personal property up to a certain amount. Nonetheless, Chapter 7 will not discharge debts secured against collateral and you will need to keep paying on them in order to keep them. If it turns out that you don’t want to keep them, Chapter 7 can discharge your remaining penalty and the outstanding balance of the debt.
Additionally, there are some debts that cannot even be discharged in Chapter 13. These debts can be rolled into a Chapter 13 repayment plan, but they are only allowed to take up so much money. Once your Chapter 13 is over, you will have to continue making payments on that debt until it is paid in full. Common examples include student loans, tax debts, and child or spousal support payments.
Your Credit Isn’t Destroyed, But It Must Be Rebuilt
If you filed for Chapter 7, the bankruptcy will remain on your credit report for the next 10 years. With Chapter 13, it’s 7 years. While that is certainly a black mark, you can prove to creditors that you’re serious about rebuilding your credit by applying for secured credit cards, taking out secured loans, and making timely payments to keep your minimum balance on both. While you may be rejected for a secured credit card, credit unions are often more willing to extend you secured credit than major banks.
The process will take time, but eventually, you will be able to take out unsecured credit again. Remain current on your payments and be diligent about your budget, and you won’t have a problem in the future.
You’ve Put Your Cosigners and Guarantors in Bad Spot
If you had anyone cosign on a loan for you, that debt will not be discharged in bankruptcy. It will just pass to them. They will still be responsible for it and they will still owe any fees associated with your defaulting. For secured loans, this can include penalties related to missed payments and other surcharges related to the default. If you’ve had someone cosign on a loan for you and try to discharge the debt in bankruptcy, you’re doing to have some serious explaining to do.
Talk to a Memphis Bankruptcy Attorney Today
The key to rebuilding your credit post-bankruptcy is demonstrating that you can borrow small sums and timely repay them. Obtain a gas card and pay its charges on time, every month.
Our Memphis bankruptcy attorney will help you with filing bankruptcy and help you get a financial fresh start.
Need legal representation? Call The Sweeney Law Firm, P.C. today for a consultation with an experienced attorney, where you can discuss your legal needs and questions.