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Personal Bankruptcy Pros And Cons
Filing bankruptcy is a huge decision with lasting impacts. Prior to filing, it is prudent to consider pros and cons and to seek counsel.
These are some pros to bankruptcy:
- Discharge from debts;
- Fresh start and breathing spell;
- Automatic stay protection and cessation from collections; and
- Retention of exempted property.
The main reason for filing bankruptcy is to obtain a discharge from unsecured debts. The discharge is a tool that lifts the burden of debt repayment. After filing Chapter 7, a debtor is released from the requirement to repay unpaid balances due after his assets have been sold because those balances are considered fulfilled. The discharge's purpose is to create a fresh start and the chance to better manage finances.
Fresh start and breathing spell
Bankruptcy laws give a debtor protections, the most significant of which are a fresh start and breathing spell from harassment of creditors' collections. Once bankruptcy is filed, collection efforts by creditors cease under the automatic stay. The purpose of the stay is to give a debtor a period to regroup financially, rebuild and develop a systematic approach for debt repayment.
Upon filing, a debtor receives the benefit of the automatic stay. The automatic stay puts a stop during the pendency of bankruptcy to collection efforts by creditors. It allows the Bankruptcy Court to set up a system to prevent creditors from racing to the courthouse to claim debtor's assets. The Bankruptcy Code substitutes its scheme for a hierarchy of creditors, debts, claims and time lines.
Retention of property
Several categories of property are exempt from creditors once a debtor files bankruptcy. Motor vehicles up to a certain value, clothing, household furnishings, life insurance, family Bibles, pets and portions of earned wages are included in exempted property. State laws usually determine types of exempt property and dollar amounts.
The following are cons to bankruptcy:
The major con of filing bankruptcy is its impact on debtor's credit. Bankruptcy can remain on a credit report for 10 years. A debtor will usually be allowed to obtain credit at a high interest rate. A debtor may be deprived of access to loans and credit and unable to obtain a mortgage. Bankruptcy is likely to impair a debtor's credit for at least seven to 10 years.
The costs for filing bankruptcy are filing fees and attorneys' fees and costs. A Chapter 7 usually costs at least $1,000 to $2,000 in attorney's fees.
Loss of property
One of the painful cons is the loss of non-exempt property. Exemptions for a debtor's property are governed by state laws that protect only essential possessions.
Not all debts discharged
Bankruptcy removes many debts through discharge, but that discharge has limits. Debts for drunk driving judgments, fraud, child support, alimony, divorce settlements, income taxes and government student loans are carved out. Once a debtor is discharged, he cannot obtain another discharge for six years, and new debts incurred after bankruptcy are exempted from discharge.