Bankruptcy Pros & Cons

Bankruptcy is a court-supervised way of dealing with debt.  

There are different types of bankruptcy filings.  For purposes of this article, the two main types are Chapter 7 and Chapter 13.  Typically, consumer debtors are most interested in Chapter 7 filings.  Chapter 7 filings tend to be faster and allow for a “fresh start.”  Not everyone can qualify for a Chapter 7 filing.

Once a debtor files a Chapter 7, various things start to happen.  The debtor’s assets and liabilities are inventoried.  The debtor gets to keep some types of “exempt” assets.  Other types of assets–”nonexempt” assets–are sold, and the proceeds are paid to the debtor’s creditors.  Once this process is complete, the debtor’s debts are “discharged,” and the debtor gets a fresh start.

A Chapter 13, on the other hand, is a lengthier form of bankruptcy filing.  In a way, a Chapter 13 filing is kind of like a court-supervised debt management program.  In Chapter 13 bankruptcies, the debtor proposes a repayment plan under which the debtor uses a portion of future earnings to pay creditors back over a three to five year period.

Pros of bankruptcy filings:
  • When you file for bankruptcy, an “automatic stay” goes into effect.  This prevents creditors from contacting you or suing you.
  • A Chapter 7 bankruptcy filing offers one of the quickest paths towards a true “fresh start” for those that qualify.
  • If your credit is already poor due to factors such as credit utilization, filing for bankruptcy may be a step towards better credit down the road.
Cons of bankruptcy filings:
  • Similar to debt settlement, many debtors will see their credit score decrease sharply upon filing for bankruptcy. Your credit report will reflect various bankruptcy related accounts for 7-10 years depending on the severity of your debt and the type of bankruptcy filing you pursue.
  • There is a social “stigma” attached to bankruptcy filing.  A bankruptcy filing (and the attendant decrease in credit rating) may have an impact on your life going forward (applying for credit accounts, jobs, housing, etc.).
  • Some types of debt will not be erased in bankruptcy.  For example, alimony or child support can not be eliminated in bankruptcy.  Federal student loans are dischargeable only under very limited circumstances.
  • If you file for Chapter 7, you will have to give up “nonexempt” assets.  If you have a particularly expensive car, for example, chances are you will have to give that up as part of a Chapter 7 filing.
  • Chapter 13 bankruptcies require debtors to comply with length repayment plans.  
  • Legal fees can be expensive, especially associated with Chapter 13 filings.

Call us today at 844-LEGAL-16 (i.e., 844-534-2516) if you would like to learn more about the costs and benefits of Evergreen’s legal plan offerings. 

Disclaimer: The information in this blog post is provided as general information only and should not be construed as legal or other professional advice.  Evergreen Legal Protection is not a law firm.  Never substitute information obtained from the internet or this blog for professional advice and guidance from a legal professional licensed in your jurisdiction.