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10 Declaring Bankruptcy Pros and Cons

Choosing to declare bankruptcy is never an easy decision. Many households decide to file for a bankruptcy after all other debt repayment options have been exhausted. It is a decision that has long lasted credit consequences, but can also provide a certain level of financial relief. These declaring bankruptcy pros and cons will highlight the key points of this critical decision.

What Are the Pros of Declaring Bankruptcy?

1. It helps to eliminate a number of debts.
Instead of having debts charged-off, which means they are still owed but not claimed as an asset by the creditor, declaring bankruptcy allows the debts to be discharged. This means they are considered forgiven and there is no longer a personal responsibility to pay them.

2. An automatic stay is issued once a bankruptcy filing is made.
This automatic stay makes it against the law for creditors to contact you with a collection attempt. When debts are being restructured, creditors still have a right to call to negotiate, but no active collection attempts can be made. For many people in debt, this relieves the stress that is involved with financial management.

3. You get to keep most, if not all, of your property.
There are bankruptcy exemptions in place even for those who are declaring bankruptcy under Chapter 7 provisions. These are assets that cannot be seized and could include your vehicles, your home, and other personal belongings. In a Chapter 13 bankruptcy, as long as you keep paying your debts on a regular basis, you get to keep your property.

4. There are protections against credit discrimination by an employer.
If you’re trying to get a job and a clean credit report is required, then it may be difficult to find work after declaring bankruptcy. If, however, you’re already employed, you will get to keep your job even with the bankruptcy because it cannot be used as a basis for employment termination.

5. It stops the threat of wage garnishment.
Certain debts may be able to pursue having money taken out of a paycheck before the check is even issued. This garnishment threat typically goes away after a bankruptcy has been declared, though may still exist for certain types of debt.

What Are the Cons of Declaring Bankruptcy?

1. Declaring bankruptcy won’t get rid of every type of debt.
Certain types of debt are known as “secured” debt. This means that they will survive even though a bankruptcy has been declared. The most common debt is child support or alimony, but student loans, the most recent back taxes that are owed, and fines that are owed to government agencies are also included and not usually dismissed except for very rare financial circumstances.

2. You may lose any non-exempt possessions in an effort to repay debt.
Certain items are exempt when declaring bankruptcy, but not every item happens to be. Certain stocks, bonds, savings accounts, vehicles and other property may be seized to repay a portion of the debt that is owed to a creditor before the debts are fully discharged. For some who declare bankruptcy, this even includes their home.

3. It has a long lasting negative effect on a credit profile.
An individual’s credit report is going to show the presence of the bankruptcy for 10 years. This makes it difficult for people to get lending or a line of credit for at least 3 years and potentially even longer. Should financing or credit be granted, it is at a significantly higher interest rate because the lender needs to be able to get a return on their lending before there is the potential of having a default occur.

4. Declaring bankruptcy has a number of costs that are associated with it.
It isn’t free to declare bankruptcy. Even when filing a Chapter 7, with legal fees, credit counseling fees, filing costs, and trustee fees, it can cost several thousands dollars before the bankruptcy will go through. That’s why a bankruptcy should only be considered when the amount of debt exceeds the amount of the expected costs of the bankruptcy in the first place.

5. It can make it difficult to find a place to live.
If you don’t already have a mortgage, most lenders aren’t going to grant one with a bankruptcy on file. A bankruptcy also makes it difficult to find a rental from many property owners because the presence of one can often be used as a credit screening tool.

These declaring bankruptcy pros and cons show that it may not always be the right decision. As a first step, consider contacting creditors about any outstanding debts to see if they can be restructured without legal assistance. If not, then declaring a bankruptcy could be the first step taken toward a financially secure future.

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