Filing for bankruptcy could help get you out of debt. But before you seek bankruptcy help, you should be aware of the pros and cons of filing. Bankruptcy is a last-case scenario if you are drowning in debt and have no way to get your head above water.
Even with the best bankruptcy attorney on your side, your credit score and resources can take a major hit. You may want to avoid declaring bankruptcy if you have an alternative way to pay your debts.
For instance, a debt consolidation loan has similar benefits to Chapter 13 bankruptcy, and having an estate or garage sale works like Chapter 7 liquidation bankruptcy.
However, filing for bankruptcy can bring about attractive benefits. For example, once you file, creditors cannot contact you; instead, they must resolve issues with your bankruptcy trustee. Typically, the trustee sets a meeting between 21 and 50 days after you file. You generally must attend, but your creditors may choose to skip out.
At this meeting, you’ll typically answer questions about your income and debt under oath. Failure to appear or provide information can result in your case dismissal. If the courts dismiss your case for not showing up, you’ll typically need to wait at least 180 days before you can refile.
Taking the mandatory personal financial management course may not sound like a benefit, but it can help you learn more about finances and how to avoid future debt. It’ll also teach you how to:
- Create and stick to a budget.
- Establish financial goals, like saving for college or a home.
- Save money in an emergency fund.
Learning how to make smart financial decisions can lead to a healthier financial situation.
Other advantages of filing for bankruptcy can include the following:
- Rebuilding your credit score and history
- Getting rid of dischargeable debt
- Avoiding repossessions
There is good reason to work toward repairing your credit and paying off debt before filing for bankruptcy. That’s because filing a bankruptcy case can negatively impact your credit score. For most filers, credit scores immediately drop between 100 and 200 points.
Bankruptcy filings are public records and stay on your credit report for years:
- Chapter 7 bankruptcy: 10 years
- Chapter 13 bankruptcy: 7 years
Another potential downside to filing is paying the bankruptcy filing fees. For Chapters 7 and 13, the filing fee is $78; for Chapter 11 bankruptcy, the fee is $571. A bankruptcy attorney also typically charges you for their time and services, along with other related charges.
Other disadvantages of filing for bankruptcy may include the following:
- Non-dischargeable debt will still be there
- You can lose current credit accounts
- You can lose your possessions
It’s recommended to weigh the pros and cons of declaring bankruptcy to see if it may be the right fit for you. A financial advisor could advise you and present alternatives. The National Foundation for Credit Counseling and the Financial Counseling Association of America have reputable debt counselors for free and low-cost services.