What Are The Advantages And Disadvantages Of Bankruptcy?

Not that we are planning on filing yet, we just hear the word bankruptcy a lot lately, and that a lot of people around are considering it. We'd like to be able to give our input when they start talking about it again, so what are its advantages and disadvantages? - Jill and Kate

Which chapter? There is a Chapter 7 and a Chapter 13 for individual filers. The other chapters are for businesses, I think.

Hah. Why do I feel like changing my question to what is bankruptcy instead! I didn't know that you have to choose between two chapters before knowing the advantages and disadvantages. I'm sorry I don't know anything about bankruptcies but would somebody be so kind as to...explain everything? Thank you so much in advance! - kate

No problem kate, and welcome to destroydebt forum! I know the moderators and some of the members, I'm sure that they'd try to answer your questions the best that they could.

To answer your question, what is bankruptcy: It is a federal court proceeding that gives the consumer/debtor a chance at a fresh start. Basically, people file bankruptcy (voluntarily or involuntarily) when the creditors/lenders/collectors are already after them and are threatening to file a lawsuit. Bankruptcy offers what they call "the automatic stay" which protects the filer from any lawsuits temporarily.

There are two general types of bankruptcy, Chapter 7 which is a liquidation process, and Chapter 13, which is a reorganization or repayment process.

In 2005, qualifying for Chapter 7 has become so tough, that most consumers are forced into filing Chapter 13 instead.

Welcome jillandkate and okay:

Chapter 7 bankruptcy is liquidation proceeding wherein the consumer receives a discharge of debts within four months.  The consumer pays debts out of his/her non-exempt assets. He/she relinquishes those assets to a trustee (court-appointed official) who then converts them to cash for distribution to the creditors, or turn the assets over to the creditors. A Chapter 7 discharge can only happen once every six years and not everyone is eligible for debt relief under it. The eligibility for a Chapter 7 bankruptcy is based on the "means test" or the income based test.

A Chapter 13 is also known as a reorganization bankruptcy wherein the consumer pays off all or majority of the debt through a court approved repayment plan, over a period of 3 to 5 years. This chapter is for consumers who have predictable fixed incomes because the repayment plan is based on them. The consumer calculates his/her income and reasonable expenses to come up with the disposable income. In chapter 13, the consumer must pay his/her debt according to priority. Both bankruptcies have a court appointed trustee.

Hello jillandkate!



The greatest disadvantage of filing bankruptcy, in general, is its ability to ruin your credit for 7-10 years. A ruined credit would make it hard for you to apply for credit cards, loans, jobs, apartments, etc. although they are not impossible, you can always repair your credit.

In a bankruptcy, not all debts are dischargeable, some of them survive bankruptcy like government taxes, child support and alimony, and student loans.

In a Chapter 7 bankruptcy since it is a liquidation process, you would lose some of your properties to the trustee, who converts them to cash and distributes to your creditors.

In a Chapter 13 bankruptcy since it is a repayment plan, your income for 3-5 years belongs to the trustee, who also distributes them to the creditors.

It's all smooth when it's a straight up case, but bankruptcies do have complications, so on top of all of those, I don't know if it is considered a disadvantage: lawyer fees. The more complicated the case, the higher the legal fees.

The automatic stay and the discharge of debt are some of bankruptcy's advantages.

Filing bankruptcy is never easy and takes over your life for 12 month. That's a year of living inside of the bankruptcy court's restrictions. What's more is the whole thing can last much longer than a year. It could extend from 5 years up to 15 years. How does that happen? A Bankruptcy Restriction Order is brought upon a consumer who is found guilty of misconducts. The other posters have already said that it could be a straight up case or a complicated case.

Another disadvantage is, although people do not generally read that part of the paper, your bankruptcy notice is published there. Bankruptcy stays in your public record for 20 years.

Another disadvantage of filing bankruptcy is the ability (or lack thereof) to borrow credit in the near future. Lenders will consider you to be a serious risk, and if they decide to extend credit your way, you can bet it will be at a very high interes rate.

Also, have you ever filled out a background check for a potential employer? The question, "have you ever filed bankruptcy before" appears on a lot of them. If you have ever filed you must answer "Yes". Not doing so is a felony offense.