Is filing for bankruptcy the best choice to resolve your debt issues? We explore some of its downsides in this article to help you make an informed decision.
About 33 percent of Americans say they’re financially healthy. While that’s 4 percent more than in 2019, it still means that over two-thirds of the US population is still facing financial hardship.
The fact is, times are hard for most Americans, especially in the wake of the coronavirus pandemic. Currently, the average American is $90,460 in debt.
Tough financial times and mounting personal debt can overwhelm anyone. During such times, many people opt to file for bankruptcy.
But is filing for bankruptcy the right step for you? The truth is, while this move seems like the ideal debt relief option for you, it has many drawbacks that you must take into account.
In today’s post, we outline eight top disadvantages of filing bankruptcy.
Understanding Chapter 7 and Chapter 13 Bankruptcy
Before we delve into the cons of bankruptcy and why you should opt for alternatives to filing bankruptcy instead, let’s look at the two main types of bankruptcy Americans can use to reduce debt.
The first main bankruptcy program is known as Chapter 7 bankruptcy. Also referred to as liquidation bankruptcy, Chapter 7 bankruptcy is ideal for Americans with a limited income and who are unable to pay back all or a portion of their debt. In this type of bankruptcy filing, the vast majority of your property will be sold to pay off your debt.
There’s also Chapter 13 Bankruptcy, also known as a reorganization bankruptcy. When you file for Chapter 13 bankruptcy, your property isn’t sold. Once you complete your Chapter 13 payments as mandated by the court, you can keep your property.
What Are the Cons of Filing for Bankruptcy?
Filing for bankruptcy is a major decision that shouldn’t be rushed into. Consider these drawbacks before taking any step forward.
Your Credit Will Take a Hit
If you’ve been able to maintain a good credit score by making your monthly payments, you’ll see your credit score drop initially once you file for bankruptcy. The good news is that after the court grants you a bankruptcy discharge, you can start improving your credit score right away.
You Might Lose Some of Your Property
If you’re filing Chapter 7 bankruptcy, prepare to give up certain valuable items before you get a bankruptcy discharge. Nonexempt property is quite rare in this type of bankruptcy.
What do you do if you want to hold on to assets when filing for bankruptcy? Talk to a seasoned bankruptcy attorney about the possibility of filing Chapter 13 instead.
Filing Bankruptcy Will Not Erase All Your Unsecured Debts
Unlike what many people believe, filing for bankruptcy does not relieve you of all your debts. Certain unsecured debts, such as child support and alimony, aren’t discharged when you file bankruptcy. Other debts that are also difficult to eliminate in bankruptcy include student loans and tax debts.
Filing Bankruptcy Will Not Protect Other Debtors
If you choose to file under Chapter 7, the only obligation to clear the debt that will be discharged is yours alone. Other people in your household who owe debts must deal with them on their own.
The difference comes when you file Chapter 13, which can also protect the co-signer. However, this works because the expectation is that you’ll clear your debt through a repayment plan.
Filing Bankruptcy Doesn’t Come Cheap
There’s a filing fee charged by the bankruptcy court that you must pay, or your case will be thrown out. Thankfully, the court allows you to clear this filing fee in up to four payments if you’re unable to pay it in a lump sum.
You’ll also need to hire an attorney. The vast majority of bankruptcy cases are dismissed, especially where the people filing them have no attorney to guide them along the way. As you can imagine, hiring a seasoned bankruptcy attorney doesn’t come cheap, but it’s all worth it.
Besides filing fees and attorney expenses, you’ll be required to pay for a credit counseling class.
You May End up in a Worse Financial Position
Even when working with an attorney, the chances of your bankruptcy case being dismissed are higher than being granted.
If your case gets dismissed, you’re left in a worse financial state than you were to start with. That’s because, during your case, the interest on your debt has been mounting. As soon as your bankruptcy protection is removed, you’re left in more debt than before.
There’s also the fact that you’ve spent money on an attorney and the filing process without reaping the primary benefit of filing for bankruptcy, which is to get a fresh start.
You Lose Your Credit Cards
The moment you file for bankruptcy, most credit card companies cancel the cards you hold. Sure, you may still receive other offers to apply for an unsecured credit card after you’ve filed for bankruptcy, but these cards will typically require considerable annual fees and charge higher interest rates.
Bankruptcy Doesn’t Necessarily Improve Your Personal Finance Skills
If you got into the financial trouble you’re in due to poor budgeting habits, don’t think that that filing for bankruptcy will help you improve. Many people who file Chapter 7 slip back to the same habits once the bankruptcy has been discharged.
Chapter 13 bankruptcy can teach you how to go 60 months without making unnecessary purchases. Unfortunately, the vast majority of people who file for Chapter 13 bankruptcy don’t complete their repayment plan. Thus, in the end, there’s neither debt relief nor improved budgeting skills for these people.
Filing for Bankruptcy Is not Always the Answer
Anyone can go through financial trouble and slip into debt. When that happens, filing for bankruptcy seems like the best option to get a fresh start. But, as you can see, this option comes with numerous drawbacks that you should consider before signing any papers.
Are you going through financial difficulty and considering filing for bankruptcy? Contact us at (402) 415-2525 today for the expert legal advice you’ll need to avoid the pitfalls that come with bankruptcy filing.