There was a time when bankruptcy was considered a stigma. Filing for bankruptcy was considered shameful, an admission that one could not manage one’s personal finances. However, today bankruptcy has become a quick fix for money problems. This is not a good idea. Let’s take a look at why you should avoid bankruptcy.
First, to understand why you should avoid bankruptcy, you need to understand what bankruptcy is. Bankruptcy was created to protect the financial health of the jobless and the infirm by eliminating high levels of debt. However, now it is used for other things.
There are two ways to file for bankruptcy. The first is Chapter 7. Under a Chapter 7 bankruptcy filing, many debts are eliminated, but the filer must liquidate personal assets to pay down some of the debt. This means that while you get rid of your debts, you also have nothing. So, your personal property is sold by a bankruptcy trustee, who then uses the proceeds to pay creditors. Of course, there are some assets that are exempt from this. Those are items considered necessary to support the filer and any dependents. The actual items change from state to state, however, in general a percentage of your home equity and disability benefits are exempt. You can only file this type of bankruptcy every 8 years.
The next kind is a Chapter 13. This type of filing does not erase debt. Rather, it requires the filer to set up a repayment plan, typically over a three- to five-year period, in exchange for keeping personal assets. So, you pay stuff back, but on a plan you can handle. If your income is above the state median and you want to file for bankruptcy you will have to file for Chapter 13 and pay back at least a portion of their debts. This kind of bankruptcy can be filed every two years.
Now, there are some debts that can not be erased with bankruptcy. These are debts like alimony, child support, property settlements, criminal judgments, fines, student loans, and taxes.
So why should you avoid bankruptcy?
For starters, most creditors will work with you, so it is unnecessary if you are honest about your desire to pay back your debts, but just have trouble doing so.
A bankruptcy filing is a black mark on your credit history. This can make it difficult to obtain loans, mortgages, and credit cards. Both a Chapter 7 and a Chapter 13 bankruptcy will appear on your credit report for 10 years.
After a bankruptcy secured loans may be more expensive to acquire. Only a handful of lenders may approve you for mortgage and car loans. Acquiring a loan or mortgage may require an initial down payment of as much as 50%. This is something many people are unable to do.
Unsecured loans may be impossible to acquire.
There are a lot of drawbacks to filing bankruptcy, and a lot of good reasons you should look to the alternatives, such as consolidating, working with creditors to reduce monthly payments, and set up a repayment plan.
The choice to declare bankruptcy is a major decision. It will affect your financial choices for years to come, and unless you change your financial mindset, it is a band aid to a major problem that will not change until your financial habits change. So, start by fixing the underlying problem, and do not turn to bankruptcy unless you are sick, hurt, disabled, and unable to work. That is what it was made for, and that is what it should be used for. Otherwise, avoid it.