Bankruptcy today is considered the court of last resort. Think about filing for bankruptcy only after you have considered every other available method of repaying your debts.
The American Bankruptcy Institute describes two purposes for bankruptcy:
- To give creditors a fair share of the money that you can afford to pay back. (Chapter 13)
- To give you, the debtor, a fresh start by discharging your debts. (Chapter 7)
Bankruptcy may be an appropriate option for you if you have contacted your creditors and negotiated repayment terms, stopped using credit cards and other loans, contacted a credit counselor and worked faithfully to stay on a debt management program -- and still cannot repay your debts. No matter which form of relief a debtor seeks, there are more disadvantages than advantages to bankruptcy.
Bankruptcy Pros & Cons
- PRO: Pardons debts, or reduces debts for individuals in severe financial distress due to circumstances such as illness or loss of a job.
- CON: Puts a blemish on an individual's credit record for 10 years, causing difficulty in obtaining cars, homes, and loans.
- PRO: Can temporarily prohibit creditors from seeking foreclosure of a home or repossession of a car. Results in higher interest rates -- or secured credit cards -- for people who are granted credit despite a bankruptcy record on their credit report.
- PRO: Can temporarily prevent wage garnishment, debt collectors' harassment, and disconnection of utilities. Does not discharge debts such as alimony and child support; most student loans; certain federal, state, and local taxes; debts from criminal activity; legal fines and penalties; luxury purchases made within 60 days of filing; and debts not listed on bankruptcy papers.
- CON: Is a notice of public record that may be seen by potential employers, insurance companies, mortgage businesses, and other lenders.
- CON: Bankruptcy can be seen as a social stigma that can cause feelings of guilt and embarrassment.
Although it may fix your short-term problems, bankruptcy can stay on your credit report for a full 10 years. Before you file, remember that you'll have to live with the negative financial consequences.