The Pros and Cons of Filing for Bankruptcy

Bankruptcy is a federal court procedure designed to help individuals and businesses deal effectively with overwhelming debt. Chapter 7 and Chapter 13 are the two most common types of bankruptcy filed by individuals who are not struggling with business-related debt. As an experienced bankruptcy lawyer – including those who practice at The Law Offices of Ronald I. Chorches – can confirm, each of these bankruptcy “types” can offer individuals and families an opportunity to begin again financially. With that said, there are both some “pros” and “cons” associated with filing for bankruptcy that everyone interested in this process should be aware of before committing to this plan of action. 

Bankruptcy Erases Some Debts but Not All

If a court grants you bankruptcy relief, it will not automatically discharge all of your debts. Examples of debt that cannot be removed or are very difficult to have erased include:

  • Alimony
  • Child support
  • Federal student loans
  • Back taxes and other money owed to the government

Additionally, it is important to understand that if you earn too much income to qualify for Chapter 7 bankruptcy relief, you’ll likely need to file a Chapter 13 repayment plan. Chapter 13 bankruptcy reorganizes debts to make their monthly repayment manageable. At the end of a successful 3-5 year repayment period, your remaining eligible debts will be discharged. During this time, you’ll benefit from the protections afforded by the Automatic Stay, which will keep creditors from coming after your assets, demanding payment, and otherwise harassing you. This process can also help you to stay in your home. 

This Process Will Impact Your Credit Score – For Worse and for Better

Your credit score will drop upon filing for bankruptcy. Depending on the type, it can stay on your credit report for up to 10 years. It will take time to rebuild your credit score. WIth that said, many people discover that they can rebuild their credit score more quickly – and more reliably – after filing for bankruptcy. Why? Every time an individual misses a debt payment, this negative activity is generally reported to the major credit bureaus. Repossessions, collections activities, and debt-related lawsuits are similarly reported. If filing for bankruptcy can help you to stabilize your finances, you may find that the temporary drop in your score is soon dwarfed by the positive credit activity happening on your report thanks to your newly stabilized financial situation. 

Many creditors look favorably on bankruptcy filings – after some time has passed – if they prove to inspire far more positive debt management activity moving forward. If you don’t file for bankruptcy and remain mired in debt and constantly missing payments, etc. your score will – simply and unavoidably – continue to drop.