Bankruptcy Pros and Cons

Bankruptcy pros and cons: is it right for you? In the midst of financial despair, it may be logical to think of bankruptcy as an easy way out of the mess. In fact, most people think that all their financial problems will be taken care of once the burden of debt gets off their back. And unfortunately, many people go for the bankrupcy without even considering all other possibilities. Even though it may relieve the burden, it should be your very last option. Considering your next ten years (financially speaking) will be severely affected, you need to consider all your options. Bankruptcy pros and cons should be carefully considered before making this drastic decision.

Bankruptcy Pros and Cons

What you need to know

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Even though the filing process is really not that difficult, the process itself can be very stressing.

Remember, your creditors want their money back and they will not make it easy for you. You will have to justify your filing, you will have to expose all your financial history to a judge and you need to have a case. You need to convince the judge that you really have no money to pay your debts back. And your creditors may dispute your case.

But even if you are successful and your debt is discharged, there are many long-term issues you need to consider very carefully before making such a drastic decision.

Your financial life will not be the same for the following ten years. You will lose any credit cards that have outstanding balances, and if you have others with no balance, they may choose to close your accounts. You will also find it extremely difficult to get a home loan (if you are planning to buy a house in the next ten years) and if you are planning on buying a car, you may get the loan but the interest rate will be very, very high. If you complain about the interest rate (say, 20% vs 7% or less), they will point at your credit report where your Bankruptcy is highlighted in yellow.

Also, please remember that not all debts will be erased through a Bankruptcy. Student loans, back taxes within the past three years and some other debts are generally exempt from bankruptcy protection. These alone can be several thousand dollars that you still have to pay back.

That uncomfortable situation will persist for the next 10 years, during which you will need to maintain an excellent credit record if you want to work your way back to a useful level of trust. Most creditors will regard any bankruptcy as the most negative criterion on any credit report and if they do decide to extend credit to you, you will have to pay a much higher interest as we discussed before.

Beyond the impact on your credit and your financial life, you may also be required to forfeit any real assets you may have – like a boat, expensive jewelry and other valuable items – depending on when they were acquired. Most states make an exception for your primary residence and your car. But if you have a rental or a secondary property, it may not be protected by your filing.

One final thing to consider is that the bankruptcy procedure itself is not free. Courts always have required fees and if you decide to hire an attorney, well, then it can get very expensive. And usually when a person is on the verge of filing for bankruptcy, they may not be able to afford it. So you may want to consider filing the papers yourself and not hire an attorney, in which case you will need to do your due diligence, study the process in detail and maybe interview people who went through the process already so you know exactly what to expect. It is not easy, but it can be done for sure.

On the upside, you will obtain relief from debt collection efforts and some may feel like a huge burden has been lifted from their shoulders. Your wages can not be garnished and any foreclosure action will be stopped. And by taking action sooner rather than later, you can start to build a new credit history that can be much better than the old one.

You will not have access to credit cards so you will need to get used to paying cash for your purchases. After a few months, you can apply for a secure credit card and make small purchases and pay the bill always on time, you can re-build your credit as soon as possible. But it will take time.

The process can serve as a huge wakeup call to change any bad money management habits. For some people, sometimes it is necessary to hit rock bottom in order to find the inner strength to make large, positive, long-term changes.

But hitting rock bottom is always very painful and there are many consequences that are not always obvious. So consider carefully if you decide to take the plunge.

Your goal should be to get out of debt fast, not whether to file for bankruptcy or not. So please consider the bankruptcy pros and cons before making any decisions.

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