A Look At The Pros And Cons Of Filing For Personal Bankruptcy


Cristina Alesci, television and digital correspondent for CNN and CNN Money describes bankruptcy very simply as, “you borrowed some money and you can’t pay it back.”

While there is no denying the fact that money problems do cause worry and anxiety, one must do a thorough research about the possible advantages and disadvantages of bankruptcy before embarking on the journey.

Below are the advantages of filing for bankruptcy:

  1. Debt reliefDebt relief

The major allure of filing for bankruptcy is the respite people get from not having to pay back their unsecured loans.  If they have filed for chapter 7 bankruptcy then they are no longer required to pay off the unpaid balance debt after liquidation of their assets.

This gives an opportunity to the debtor to start afresh and manage their finances in a better way in the future.

  1. Buys time

If you are constantly bombarded with calls from money lenders then filing for bankruptcy will put an end to this menace. This is because as per law all collection efforts must be halted as an automatic stay is imposed after filing for bankruptcy.

The main purpose of the automatic stay is to put a stop to the harassment meted to the debtors by the money lenders. It also allows the Bankruptcy Court to enact a provision that prevent creditors from staking a claim at the borrower’s assets.

The bankruptcy courts issues an order of hierarchy of the various creditors, sets the procedure and timelines for clearing the debts.

This provides the debtors a breathing space and buys them time to decide on the future course of action.

  1. Retention of property that is exemptedRetention of property that is exempted

Once a bankruptcy claim has been successfully filed, then creditors cannot lay claim to certain categories of personal belonging such as vehicles that are of a certain value, life insurance, pets, a part of the wages, household furnishing etc.

The type of property that is exempted depends on the State laws. In certain cases the federal bankruptcy laws take precedence and decide on the properties that are exempted from creditor’s grasp.

Bankruptcy is double edged sword. Along with the many benefits one must also give due consideration to the following disadvantages before filing for bankruptcy.

  1. Poor credit report

It is no secret that filing for bankruptcy bears an impact on the credit rating for a period of ten years. Debtors may find it difficult to seek additional loans and credit cards. Even if debtors are able to obtain credit the interest rate will be higher than before.

  1. Legal expense

Filing for bankruptcy requires paying for registration fees. It is highly recommended to file for bankruptcy with the help of a reputed attorney. This causes additional expenditure. In a few jurisdictions bankruptcy attorneys charge one to two thousand dollars as fees.

  1. Loss of property

This is another harsh reality one must consider before filing for bankruptcy. The creditors can stake a claim on properties that are not exempted by law.

The State laws decide on the properties that can be exempted and not exempted. Therefore must do adequate research before filing for bankruptcy.

  1. Chain reaction

It’s a myth that the effects of personal bankruptcy is limited only to the individual who files for bankruptcy. As loans of most businesses are co-signed by the owners of the business, a negative credit report of the owner bears an impact on the loan seeking capability of the business.

This may result in a financial crutch which will have a detrimental effect on the overall health of the business. In extreme cases the business itself may become bankrupt resulting in loss to the employees and the various stakeholders.

  1. Not all debts are forgivenNot all debts are forgiven

People assume that after filing for bankruptcy, all their loans will be waived off. But this is not always the case. Bankruptcy laws do eliminate many loan discharges but there are a few discharges that are not forgiven such as any debt incurred due to:

  • Drunken driving judgments
  • Child support
  • Fraud
  • Divorce settlement
  • Income tax

Filing for bankruptcy is not an easy road. Therefore one must seek Debt Advisors Madison expert opinion in order to determine if it is the right course of action.