Cons of Filing Bankruptcy: Considerations Before Making a Decision

In the US, bankruptcy has long been stigmatized. Filing for bankruptcy is always associated with being careless, unethical, or indolent. However, many Americans end up in bankruptcy as a result of unanticipated life events like divorce, a medical emergency, or losing their jobs.

The purpose of bankruptcy is to shield debtors from creditors and offer them a second chance. However, declaring bankruptcy is a difficult choice, and while it might be the best course of action for some people, it’s not always the greatest option.

Should I File for Bankruptcy?

The answer to this question is a bit controversial. Filing for bankruptcy could be a smart move if you have multiple debts that you are unable to pay back or if your mortgage payments are late and you have run out of other options.

Remember that the kind of debt you have will determine how much financial relief you will get from filing for bankruptcy. Child support payments, the majority of past taxes, and other debt arising from court duties are not discharged by bankruptcy. Additionally, student loan debt is typically difficult to discharge. However, the US Department of Education (ED) recently announced that it is thinking about giving students who owe money on their loans the option to file for bankruptcy.

A credit counselor can assist you in assessing your existing financial status and deciding if filing for bankruptcy is viable. You might need to meet with a credit counselor, nevertheless, as receiving credit advice from a government-approved business is a prerequisite for filing for bankruptcy.

You should also speak with a lawyer when deciding whether to file for bankruptcy. A lawyer can provide you with advice on which of your debts qualify for bankruptcy relief, as well as whether to file under Chapter 13 (also known as reconstruction bankruptcy) or Chapter 7 (also known as liquidation bankruptcy).

Now that you know what to do when you can’t pay your outstanding debts, let’s take a look at the cons of filing for bankruptcy:

Consequences of Filing for Bankruptcy

Long-Term Credit Damage

One of the most immediate and impactful consequences of filing for bankruptcy is the severe damage it can inflict on your credit score. Depending on the type of bankruptcy filed, this can remain on your credit report for seven to ten years.

This can make it extremely challenging to obtain new credit, secure loans, or even get approved for rental agreements. The negative mark can lead to higher interest rates and less favorable terms on any credit you are able to obtain.

Loss of Property

In a Chapter 7 bankruptcy, non-exempt assets can be sold off by the bankruptcy trustee to pay creditors. This means that you could lose valuable property, including your home, car, or other significant assets.

While there are exemptions that protect some property, they vary by state and might not cover all of your possessions. In a Chapter 13 bankruptcy, while you may be able to keep your property, you will still need to adhere to a strict repayment plan.

Impact on Future Employment

While it’s illegal for employers to discriminate against you for filing bankruptcy, it can still influence hiring decisions. Potential employers, especially those in finance or positions of trust, might view bankruptcy as a sign of financial irresponsibility. This could limit your job prospects or advancement opportunities.

Limited Eligibility for Certain Bankruptcies

Not all individuals qualify for every kind of bankruptcy. For example, in order to be eligible for Chapter 7 bankruptcy, you have to pass a means test in which your income is compared to the median income in your state. You may be required to file for Chapter 13, which necessitates a repayment plan if your income is too high. For many people, this might be restricting and unfavorable.

Not All Debts Are Discharged

It’s a common misconception that bankruptcy wipes out all debts. Certain obligations, such as student loans, child support, alimony, and certain tax debts, are generally not dischargeable through bankruptcy. You may find that after the process, you still have significant financial obligations that need to be addressed.

Public Record

One of the most embarrassing cons of filing for bankruptcy is that your records become public. Meaning that your financial struggles are accessible to anyone who searches for them. This can affect your reputation and personal relationships. Potential employers, landlords, and even acquaintances can easily discover your financial history.

Potential Loss of Tax Refunds

In some cases, tax refunds can be considered part of your bankruptcy estate and used to pay off creditors. This means you could lose any refunds you were counting on, adding to your financial troubles.

If you file for bankruptcy after receiving your tax refund, the money may be considered an asset that needs to be disclosed in your bankruptcy filing. If you file before receiving your tax refund, the anticipated refund can still be considered part of your bankruptcy estate.

Impact on Utilities and Insurance

Some utility companies and insurance providers may consider a bankruptcy filing a sign of financial instability. This could lead to higher deposits for utility services or higher premiums for insurance policies.

If you are behind on your utility payments at the time of filing, there is a risk that your services could be disconnected. However, bankruptcy law provides some protection against this. Specifically, under the Bankruptcy Code, utility companies cannot refuse or disconnect service for at least 20 days after you file for bankruptcy. This gives you some time to catch up on your payments or make arrangements.

Final Word

In conclusion, if you are still asking yourself, “Should I file for bankruptcy?” The answer is “Yes” if you have explored other options. Keep in mind that the process is emotionally draining. The stigma associated with bankruptcy, combined with the stress of financial uncertainty, can lead to anxiety, depression, and a sense of failure. The process itself can be complicated and stressful, involving court appearances, detailed financial disclosures, and meetings with creditors.

Hiring a bankruptcy attorney can be costly, adding to your financial burden. The process includes filing fees, court costs, and potentially other legal expenses. However, this is necessary as they can help you every step of the way and ensure you are not further drained by all the forms you need to complete.

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