Pros and Cons of Filing for Bankruptcy
Lets talk about the pros and cons of bankruptcy. Now, I’m going to focus on Chapter 7 and Chapter 13 bankruptcy, because these two are the most common types of consumer personal bankruptcies. First off, let me explain the difference between the two chapters. Chapter 7 legally discharges your debt. So your creditor gets very little in return from this chapter. Keep in mind, you have to qualify for chapter 7. A means test will be used, which is state-specific that factors in the size of your household. Chapter 13 is where you’re basically in a forced repayment plan that can go either 3 or 5 years. The majority of these cases go 5 years, and a trustee will be overseeing every aspect of your financial life.
So let’s get into the pros. In Chapter 7 debts are eliminated, they’re legally gone. Also Chapter 7 is pretty quick. As far as all of the different mainstream debt relief options go, your average bankruptcy is going to see a discharge from filing to over in 90 days, or a little bit longer. It’s quicker than trying to settle debts over a period of time. Another pro is legal protection that you get from the courts. So lets say that you are being sued, and now you’re worried about your wages being garnished, as soon as you file for bankruptcy, you’re protected. This legal protection from the court is valuable in a lot of situations. You can stop a repossession of a vehicle. You can stop a foreclosure, and gain time to resolve the issue.
In Chapter 13 there’s usually a savings element. Now in Chapter 7 you can discharge a debt without paying anything towards the debt. Whereas, in Chapter 13 you’re repaying some, and sometimes all of the debt. But a lot of times you can save half. So if your income is a certain amount and stable, and your expenses are this, there’s only so much left over to give. The left over part would be what the creditor gets. So there is a pro in Chapter 13, but be aware of one of the cons. When you claim bankruptcy it will damage your credit. You can forget about any new financing options for about five years. And Chapter 7 it’s going to stay on your credit report for ten years.
Bankruptcy is not the end of your credit, but it will pause your financial goals for the next two to three years. Chapter 13 involves making set payments to a trustee. If you miss a payment, you lose the benefit of the plan. You lose the court protection, so if a creditor sues, you’re on your own. Under Chapter 7, a bankruptcy trustee can force you to liquidate certain assets like a home, an extra car, and personal items of value. As you can see bankruptcy has its pros and cons. Just be aware of what you can gain and what you can lose, if you’re going to file!
