Pros and Cons of Filing for Bankruptcy

Benefits

• Most debtors are aware of the benefits of bankruptcy. Once a bankruptcy petition is accepted by the court, an automatic stay goes into effect, which should stop most credit collection attempts, including those annoyingly constant phone calls. And, bankruptcy can help debtors get out from under some kinds of debt so they don't have to pay. At the same time, most states have exemption laws that protect a homestead, vehicle and other essential assets from liquidation, even in a Chapter 7 bankruptcy.
  
  

Types

• But, without a doubt, the specific pros and cons of a bankruptcy filing will depend on what type of bankruptcy protection is sought. A Chapter 7 bankruptcy, for example, can discharge more debt than other types, but would most likely force an individual to liquidate most of their assets. A Chapter 13 bankruptcy will come off a credit record sooner than a Chapter 7, but will only reorganize, rather than discharge, most debt. Chapter 11 is reserved for corporations or individuals with very large, multi-million dollar estates, and, though it operates very much like Chapter 13, costs significantly more to undertake. Other bankruptcy chapters are designed for specific types of debtors and are not available to most individuals.
  
  

Effects

• The negative effects of bankruptcy are undeniable, but are usually overshadowed by the benefits. The destruction of an individual's credit for several years is inevitable in a bankruptcy filing, but in many cases, the credit score is already severely damaged before a bankruptcy petition is filed. As a result, it will difficult to obtain credit and loans, such as a home mortgage. At the same time, bankruptcy cannot discharge priority debt like student loans, alimony, taxes and child support. And a Chapter 13 will not discharge most debts, at all, only provide for a chance to restructure the debt. Before accepting the cons of bankruptcy then, it is a good idea to attempt negotiation with creditors.
  
  

Time Frame

• One of the cons of bankruptcy is that the pros can only be realized every six years. If an individual gets into financial trouble again before that period expires, then he must file for another bankruptcy chapter, if he is eligible, or find some other recourse. Though an individual's credit score and options will begin to improve almost immediately after the bankruptcy is discharged, the bankruptcy itself stays on the credit history for 10 years if a Chapter 7, and seven years for a Chapter 13.
  
  

Significance

• Bankruptcy proceedings are a matter of public record, so if privacy is an issue, bankruptcy might be an undesirable option. This means the fact of filing bankruptcy will be advertised in newspapers so that creditors can file claims. But the fact that a person filed bankruptcy will also be available to future creditors, employers and landlords so long as it appears on the credit history report.