Advantages/Disadvantages to Filing for Bankruptcy
Posted by: Michael Schwartz
August 29, 2007

When I meet a potential client for the first time, it is necessary to determine whether or not a bankruptcy is beneficial for that potential client.  Part of that analysis it reviewing the advantages and disadvantages to filing for bankruptcy.

ADVANTAGES

The Discharge - The principal goal of most Chapter 7 bankruptcies is to achieve a discharge of unsecured debts.  By obtaining a discharge in bankruptcy, the Debtor (person filing for bankruptcy) is no longer legally obligated to repay the debt.  The bankruptcy is a quick and easy way to end creditor harrassment, anxiety, and financial stress normally associated with a high amount of debt.

Protection of Property - When a creditor sues and obtains a judgment, their next step is usually execution on that judgment.  When executing on a judgment, a creditor can force the sale of personal property and garnish bank accounts.  Bankruptcy is a sure way to stop the creditor from execution and protect the Debtor's property. It is important to note that the amount of property that bankruptcy will protect is limited by the allowed exemptions under the bankruptcy code.

Modification or Elimination of Secured Debt - Bankruptcy gives Debtors ways to deal with secured creditors.  In some instances, judgment liens against one's home can be eliminated in bankruptcy.  In a chapter 13 case, payments on secured debts may be reorganized and a reasonable time can be gained to cured any defaulted secured debt.  Often, this will allow a client to keep a home or car that would otherwise be lost to foreclosure or repossession. 

The Automatic Stay - Once a bankruptcy is filed, the automatic stay forces an abrupt halt of most creditor actions, including repossessions, garnishments, sheriff sales, foreclosures, utility shut-offs, lawsuits, and in many cases, evictions.

DISADVANTAGES

Dispite all the the advantages that bankruptcy offers, there are reasons for choosing not to file a bankruptcy petition.  Sometimes, particular facts to a case would cause a negative effect in bankruptcy; sometimes, someones issues can be addressed without the need for filing bankruptcy.

Loss of Property in Bankruptcy - A possible outcome in a chapter 7 bankruptcy is the loss of unexempt property.  It is critical when I meet a client to analyze their assets and compare those assets to the available exemptions to determine whether or not property of the client is exposed to sale by the Trustee.  For most cases, the loss of property is not a problem.  In the vast majority of chapter 7 cases, all of the filing Debtor's assets are exempt.  In cases where there is unexempt assets, Chapter 13 may be a viable option.  In Chapter 13, the amount of unexempt assets is merely used as one of the variables to determine how much needs to be paid to the unsecured creditors.  In a Chapter 13 bankruptcy, unexempt property is not exposed to sale by the Trustee.

Effect on Credit - A notation of the bankruptcy filing will be part of the Debtor's credit report for ten years.  However, the bankruptcy may have some positive effect on credit.  Once the bankruptcy is discharged, the Debtor is legally no longer obligated for the debt.  This has to help the Debtor's ability to pay in the future.  It has been the recent trend that creditors will extend credit after the discharge.  Of course, the interest rate may not be at the best rates.  Some creditors actually solicit recent bankruptcy Debtors.

Cost of Filing Bankruptcy - The costs of attorney fees and filing fees dictate that a client would need substantial debt, threats of legal action (foreclosure/repossesion), or unbearable harrassment to justify the filing of a bankruptcy.  Generally, for a Chapter 7 bankruptcy, one could expect to pay anywhere from $1000 to $1500 for attorney fees alone.  Therefore, when a potential client has debt under $5,000 I rarely recommend filing bankruptcy because of costs.  In these cases, it is usually best to attempt to negotiate settlements with the creditors.

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