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Bankruptcy Is Rarely the Answer – Here’s Why

Chapter 13 Bankruptcy

Bankruptcy is often seen as an easy way out. “It doesn’t matter if I can’t pay my debts,” people say. “I’ll just go bankrupt.” After all, isn’t that what all successful businessmen and celebrities do? They seem to do okay for themselves and if they can get away with it, then why can’t everyone else?

The problem is, as you may have gathered from the title of this article, bankruptcy is never that straightforward and it is certainly not that easy. There are several reasons for this, but the main ones are listed below.

Different Forms

There are many different forms of bankruptcy, ranging from ones that affect businesses to ones that affect individuals. The main forms, however, are Chapter 7 and Chapter 13, neither of which are great prospects and both of which will need to be considered by individuals if they are going to go bankrupt.

It’s not like you get a choice here. You can’t say, “I don’t want Chapter 13 because it will hurt me too much. I’ll opt for a lesser one.” That’s not how it works. The other forms of bankruptcy relate to situation and scale of debt, not to preference. Also, there are forms of bankruptcy that can only be declared by official bodies (schools, hospitals and clinics, etc.,) and by businesses. In other words, you will get what you are given, and what you are given is not very appealing, because …

You Don’t Choose What to Keep

If you file for a Chapter 7 Bankruptcy then you don’t need to pay off your debts and the slate will be wiped clean. Great, right? Well, not quite. You will lose everything that is not listed as “exempt” property. This can include your home and your car, which may sound good, but the laws differ from state to state on what can be classed as “exempt” and there are a lot of things that don’t fall into this category.

For instance, any cash you have and any money you have in bank accounts or savings will go. You will basically have no money to start afresh with. You will also lose any additional cars or homes you have beyond your exempt one, as well as high-value collections, such as antiques and stamps.

All of this will be liquidated in order to pay off your debts. If you file for Chapter 13, then you will need to repay some of your debts, but not all. The difference is all about the size of the debt, if it’s high then you will be filing for a Chapter 13 instead of a Chapter 7. In this case you will be required to setup a repayment plan whereby you need to pay back money within 3 to 5 years.

If you complete this plan then the debts that remain will be wiped clean. If you do not, then debtors can chase a Chapter 7, in which case you’ll start losing property and money.

You May Never Get Over It

A bankruptcy can remain on your credit report for as much as 10 years, with 7 years being the lowest. Think about that for a moment: your financial life is based on credit. You need credit to get loans, to get a mortgage. You need it for cars and other high value items and your credit score is also factored into other aspects of your life, from applying for a job to getting student loans.

This is basically the biggest negative mark on your credit report and it will be there for as long as a decade. What’s more, you can’t just keep filing for bankruptcy whenever you’re in trouble. So, if you do it now to get out of trouble and then you need to do it again, you might not be able to. That could leave you with nowhere to turn, which in turn could make you jobless and homeless.

Some Debts Remain

There were a lot of negatives there, but you might still be thinking, “At least all my debts will have cleared.” That might be the case for some, but there are many debts that will not be touched, debts that you will still have to pay back and these could be the biggest debts you have.

For instance, any back taxes you owe will still be owed. You will also need to pay back most student loans, as well as alimony, child support and fines owned to government companies. In other words, the slate isn’t entirely wiped clean and you’re not out of the woods yet.

So, think twice before you file. And when you do, make sure your choose your attorney carefully and get ready for a bumpy road ahead.

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