8 Advantages and Disadvantages of Bankruptcy

Bankruptcy is a common term often heard when an individual or company is in dire straits when it comes to finances and is unable to pay bills and creditors. However, most people only know only a tad about this legal status. Yes, this is more of a legal matter than a financial one since it needs to be initiated by the debtor and in most jurisdictions, is imposed by a court order. Having said that, anyone or any entity cannot just declare verbally or in writing that he or it is bankrupt. However, if an individual or entity is able to submit evidence and prove eligibility to file, the bankruptcy court will give protection during the bankruptcy proceedings.

Bankruptcy has both advantages and disadvantages that can work for or against the filer. And although this can be the last resort to get out of debt and total financial downfall, it is always best to weight its pros and cons before any action is done.

List of Advantages of Bankruptcy

1. Automatic Stay
When an individual or entity files for bankruptcy, the U.S. bankruptcy law know as automatic stay makes creditors somehow powerless to take action and collect from the debtor. After the filing, injunction is automatically ordered which prevents creditors from running after the debtor and the debtor’s properties. This also prevents creditors from calling, suing and in general, harassing the one who owes them. Automatic stays usually lasts until the bankruptcy case closes or in the case of having a prior bankruptcy declaration, for thirty days. Also, this does not erase the debt of the debtor but only postpones the collection of debt. It also has exceptions. Legal actions that are exempted from automatic stay are collection of alimony or child support, criminal proceedings, government audits on tax liabilities, co-debtors and paternity establishment.

2. Increased Credit Score Rating
Although the bankruptcy filing record will stay for seven to ten years, a debtor can take this time as an opportunity to improve credit score. An important thing to remember is to always have a copy of the credit history and take heed of these tips. First, ensure loans are paid on time and to keep from taking out any loans, particularly payday loans. Second, save at least 10% of the monthly income. Once bankruptcy has been released, the debtor should open a secured credit card account. By following these steps, credit score rating can be rebuilt after some time.

3. Unsecured Debts Paid Off
Bankruptcy has several types and one is the Chapter 7 proceeding. With this type, some of the properties of the debtor will be sold to pay the debtors. The good news, however, is that there are properties the debtor can keep such as furniture pieces, clothes and care. Moreover, debts not guaranteed by collateral are automatically wiped out.

4. Bankruptcy Exemptions
Although filing for bankruptcy can affect a person’s credit score, it also exempts the debtor from some losses. Aside from erasing unsecured loans and keeping furniture in the home, car and clothes, exemptions are set by the federal bankruptcy code or the laws of the state. There is also the homestead exemption where in some states like Florida, there is no limit. Also, if the home does not have equity and the value is still under the exemption limit, the debtor gets to keep the home. Retirement assets are also included in the exemption.

List of Disadvantages of Bankruptcy

1. Loss of Property
Despite the benefit of getting to keep some possessions, properties of debtors can be seized and sold to pay off creditors. This can definitely affect an individual or a business especially if the properties have high market values and the potential to increase market values. Additionally, if the property of a debtor that will be sold has a sentimental value to the family, this can be a major setback.

2. Tax Refund Denial
For debtors who have businesses and used to apply from tax refunds from the local government or state and federal governments, filing for bankruptcy can backfire because they will not be able to get approval from tax refunds which could have been a large amount of money.

3. Credit Card Score
Definitely, this will be affected after bankruptcy is declared. Worse, major credit cards might get canceled and applying for mortgage or any loan is not possible for many years. If the debtor has been relying on credit cards to get by and is in between jobs, this can be a major blow.

4. Domino Effect
The disadvantages of declaring bankruptcy are apparent and this legal status will simply affect many areas in a person’s life and even career. Some companies looking for potential employees do background checks and more often than not, applicants with bankruptcy records are not shortlisted. This also goes landlords because they will have to check their potential tenants’ credit history and bankruptcy is not a good thing. Some debts like tax debts, student loans, liens and support orders are not exempted from bankruptcy and the debtor still has to pay for these. This is one setback debtors have to take to heart.

Bankruptcy Types

Chapter 7 – some debts are wiped out but other assets will be sold or seized to pay creditors

Chapter 9 – for municipalities such as towns, counties and school districts for debt reconstruction

Chapter 11 – available for businesses to give them the chance to schedule repayments of loans and keep the operations going

Chapter 12 – for farmers and fishermen debtors who are given the chance to pay their debt over time through repayment schemes

Chapter 13 – ideal for people who are financially challenged and want to keep their properties as well as pay their creditors over a period of three to five years.

Chapter 15 – for international bankruptcy issues

After weighing the advantages and disadvantages, it appears that any person or entity is better off avoiding filing for bankruptcy. Preventive measures are better than resorting to this legal status.