Bankruptcy Pros and Cons

The Advantages and Disadvantages of Bankruptcy are often like two sides of the same coin.    How they factor into a decision to file for bankruptcy is often fact-driven.   Some forms of bankruptcy may better serve certain goals.

PRO        A bankruptcy filing frees up income.

A bankruptcy filing often frees up income.    The Debtor, no longer required to make payments to unsecured creditors or making reduced payments, typically has more income available.    This should eliminate the need for credit cards and allow for the ability to set aside funds for necessities.

CON        A bankruptcy filing results in the loss of credit cards and other credit lines.

For many debtors who come into the office, this is not an issue because they have reached the limit of their credit cards or otherwise been denied further credit.   However, for some the loss of credit card use is a bother.    Debtors should be cautious that they are not just delaying the inevitable.    If the credit cards can be paid without giving up necessities, and the situation is likely to improve, it may be possible to keep up with the payments in the long haul.    However, some Debtors delay seeking relief until they are forced to acknowledge and deal with the problem by running up against credit limits.     Once this happens, the spiral starts with overlimit fees, late charges and other problems.    By failing to realize or acknowledge the problem, Debtors delay getting the help and needlessly suffer to no advantage.

PRO       A bankruptcy filing provides tools to protect assets.

Except in rare instances, a bankruptcy filing does not make assets available to creditors that were not already at risk for being taken by creditors who are willing to go so far as to obtain a judgment.    Filing a bankruptcy case provides a number of tools for Debtors to protect assets and maintain control of them.    Exemptions protect assets deemed by law from creditors.    Bankruptcy often provides an opportunity to require a secured creditor to accept certain treatment.   Liens and junior mortgages that are not protected by equity may be removed, protecting the Debtor’s ability to accumulate future equity.  The automatic stay protects debtors from the loss of assets by preventing creditors from continuing with collections efforts while the rights of creditors are resolved.    Some forms of bankruptcy provide debtors with an opportunity to catch up on or restructure the debts of creditors who have collateral for their debts such as a car or home loan.     Debtors who want to keep assets that are not protected by an exemption may be able to arrange a buy-back from the Chapter 7 trustee or pay the creditors over time in a Chapter 13 and keep the assets.   Debtors, freed of the burden of credit card debt may be better able to pay for necessary assets such as the home or vehicle.

CON     A bankruptcy filing results in potential loss of assets, including tax refunds.

For debtors who have assets that cannot be protected or claimed as  exempt in a bankruptcy case, filing bankruptcy can result in the loss of assets.    These same assets would typically be available to a creditor who obtains a judgment and may be available to other creditors such as the IRS, without obtaining a judgment.      The only means outside of bankruptcy to avoid the risk that a creditor would be able to recover these same assets would be to pay or make other arrangements for the debt.     Weigh the loss of a tax refund against the advantages of the bankruptcy filing.

PRO     Debtors who file for bankruptcy get a Credit “Fresh Start” and an enhanced ability to re-establish credit.

Yes, bankruptcy typically has some negative impact on credit.    How much and for how long depends on a number of factors including the Debtors credit score prior to the bankruptcy, the form of bankruptcy relief the Debtor chooses (if multiple options are available), what other options are available to the Debtor and what a creditor chooses to do about the debt.       For instance, Debtors who have higher credit scores at the time of filing will see a larger drop in credit score that Debtors with lower scores.    Debtors who file Chapter 7 will likely see higher credit scores and will likely obtain new credit while Chapter 13 debtors are still in repayment plans and not incurring new debt except with Court approval, typically car or home loans.    On the other hand, the impact of a Chapter 7 lasts longer on the credit reports than a successful Chapter 13.    The timing of the next major purchase for which the Debtor will want to use credit is also important.

The importance of the fresh start in re-establishing your credit should not be underestimated.   Keep in mind that a credit score is designed to predict how you will handle new credit.    For this reason, sometimes a factor such as a bankruptcy filing will have an unanticipated effect.    Having rid himself of old debt, a debtor may be more willing and able to pay new debt.    And, a debtor will be unable to avail himself of some forms of bankruptcy relief for a long time after the bankruptcy.

CON       The filing of a bankruptcy has a big impact on your credit score and is a decision that should be weighed carefully.

Bankruptcy is of public record and will have a major effect on your credit score.   The ramifications should be weighed carefully before the decision to file is made.    It will have a significant impact, particularly where continued credit problems occur.   There are limits as to how often bankruptcy relief can be obtained and relief may be less effective if multiple filings occur.

PRO          Bankruptcy may help avoid the embarrassment or stigma that comes from defaulting on a debt.

While the filing of a bankruptcy case is a public record, typically there is no reason for the filing to be general public knowledge.    While your creditors are notified by the Court, the filing is typically not published in the local paper and would require some effort to discover.    It is of little interest to most people.    When a case is filed, most of the interaction involved is with your own attorneys office.    Otherwise, most debtors who file Chapter 7 and Chapter 13 cases only attend a single meeting which is conducted by a trustee.     The other attendees are usually limited to others who are also requesting bankruptcy relief, the trustee and/or their attorneys, your attorney and other debtors attorneys and a few creditors.

On the other hand, bankruptcy may allow you to avoid the embarrassment of collection calls at work or at home, collection letters or visits, having your employer served with a garnishment, having the process server visit you at home or at work, having your home foreclosed or vehicle repossessed from your home or in the office parking lot.     Perhaps even worse, the worry of all of the above.    Most in bankruptcy are able to avoid all of the above.    Even in cases where it cannot be avoided, some level of control over and predictability that is created by the bankruptcy filing can make it easier to cope with.

CON     The filing of the bankruptcy is a public record and there is a possibility that it could be temporarily noteworthy.

There are also debts that are not included in the bankruptcy discharge that may still subject you to some possibility of the above, such as most taxes and virtually all student loans.     Secured creditors may still have to complete a foreclosure or repossession for property that is to be returned to the creditor.    You should have some warning, however, as a result of the filing of the bankruptcy case, and may obtain additional time to maintain possession while deciding how to proceed.

PRO       Bankruptcy provides the opportunity for disclosure.

Sometimes disclosure is what is required in order to solve a problem.     Making a full disclosure to the Court allows the debtor to not only obtain bankruptcy relief but the honest debtor can be assured that he or she is entitled to relief, their case having been vetted by the trustee and Court.    An acknowledgement can start the Debtor on the road to financial recovery.    In cases where the Debtor needs to reorganize or restructure debts, bankruptcy can provide a predictable framework to balance the interests of the debtor and creditors.    Bankruptcy provides a unique opportunity to solve some debt problems based upon the very opportunity of noticing all creditors of the debtor and requiring that they come to the same location for relief.    Because the bankruptcy law determines how creditors interests should be balanced as opposed to who obtains the first judgment.     Creditors can move on, assured by the disclosures the debtor has made that they have received what they are entitled to, information each creditor would have to obtain a judgment to get outside of bankruptcy court unless the debtor provided it voluntarily.     Outside of bankruptcy court, it can be difficult to settle with creditors one at a time and provides little assurance that all of the debts can be resolved.   Creditors with an accurate view of the debtors complete financial condition may be more willing to negotiate with debtors.

CON     There is a loss of privacy.

Debtors are required to disclose a great deal of private financial information that is available to anyone who wants to look at the records.   It is a snapshot so the information is time limited and for those without a court account for online access the process to obtain the information can be tedious and expensive.      The Debtor must be willing to testify completely and truthfully and prepared to provide all reasonable financial information requested by the trustee.    In some instances, the Debtor may need to submit to an audit.

The consequences of dishonesty in the bankruptcy process.    The disclosures are made under oath.   The testimony at the meeting with the trustee is given under oath.   That means that lying is perjury and criminal.    Because the bankruptcy process is founded upon honesty, everyone involved with the process takes it very seriously when someone is not truthful or fails to disclose necessary information to the Court.     This includes our firm.    If a client is not willing and able to be completely honest with the Court and the attorney during the process,  we recommend that they do not file bankruptcy.   In that case, it is simply not worth the risk.   Honesty and a willingness to provide the documentation if necessary is an absolutely essential part of the bankruptcy process.

PRO      Most debts are dischargeable in bankruptcy.

Unless there is an element of wrongdoing that is related to a debt or there is a policy reason that a particular debt should not be discharged, most debts are dischargeable in bankruptcy.    The major exceptions are child support and alimony obligations and in some instances other relief granted in a family law proceeding, virtually all student loans and most taxes.    There are some other exceptions to discharge that do not occur very often.    An attorney, after discussing your specific situation, can help you assess whether there is much risk that you will have an issue with any of these types of debts.

Even where some of the debt is not dischargeable, the debtor may still be in a better position with respect to these debts since eliminating other debts can make the debtor better able to make payments towards the debts that cannot be discharged.   Even where debts, such as student loans cannot be discharged, some forms of bankruptcy may allow the debtor to obtain a more favorable payment plan, force a creditor to take payments over time or control the amount of a payment and prevent other collection activities such as with student loans.

CON        Some debts are not dischargeable in bankruptcy.

This means that for some, bankruptcy relief is not complete relief.

PRO         Bankruptcy is one of the least expensive means of resolving debt.

When compared to the potential cost of defending multiple lawsuits or other programs for the re-payment or resolution of debt,bankruptcy is not only one of the most comprehensive but also one of the least expensive.   It can be even more economically attractive because all or a portion of debt will likely be forgiven in the bankruptcy case.

CON           Bankruptcy does cost money and fees typically must be paid before the case is filed.

There are attorneys fees and costs for filing a bankruptcy case and most attorneys will require all or a significant portion of these fees and costs before the bankruptcy case is filed.  Most bankruptcy attorneys will accept payment plans and can provide some relief before the bankruptcy case is filed.

PRO           Bankruptcy provides additional “tools for the adjustment of debt that are not available outside of bankruptcy.

For some situations, bankruptcy provides tools that are simply not available outside the Courts.

  • Bankruptcy can provide a global solution to debt problems, unlike other methods that do not deal with some creditors.
  • Bankruptcy stops almost all creditor actions and harassment as soon as the case is filed.
  • Bankruptcy stops other court proceedings to collect funds from the debtor.
  • The results of bankruptcy are typically quicker and more predictable than some other forms of debt relief.
  • In bankruptcy, Debtors may be able to eliminate unsecured mortgages and liens.
  • When a driver’s license has been taken for financial responsibility reasons, bankruptcy can provide a means of getting the license back.
  • Even where debts cannot be discharged in bankruptcy, the filing of a bankruptcy case may force a creditor to accept terms more affordable for the debtor.

Before opting for a bankruptcy filing, you should discuss your specific situation with a qualified bankruptcy attorney to help determine how the pros and cons of bankruptcy weigh in your particular situation.