What Are the Consequences of Bankruptcy?
Although there are many myths surrounding bankruptcy, filing for bankruptcy does in fact have several factual consequences that you should consider. Some of these consequences are positive, some negative, others are somewhere in between. Like any other legal process, there are various factors that you should weigh before undertaking a bankruptcy filing. However, bankruptcy is a unique legal process, and as a result, even many non-bankruptcy lawyers can be quite confused by its consequences.
Starting off on a positive note, one consequence of completing the bankruptcy process is the discharge. The discharge is a permanent order from the bankruptcy court that forever prevents your creditors from trying to collect on most debts that you incurred before you filed for bankruptcy. There are exceptions. Some debts cannot be discharged in bankruptcy (like recent taxes, alimony, child support, and a few others), and some can be discharged under certain circumstances (student loans). The discharge is the usually the ultimate goal of bankruptcy and can be considered the most positive consequence.
However, a negative aspect of the discharge is that it does not extend to your property. For example, if your home loan lender has a lien on your house, the lien will remain after bankruptcy, and the lender could be free to foreclose on your home if you default on your loan.
You may be able to work out a deal with your lender for what is called a reaffirmation, an agreement to take the loan out of bankruptcy. But that would require that you continue making payments.
The discharge also does not extend to any other person who owes on the same debt. For example, if you and your brother both use the same credit card for purchases, the discharge would essentially erase the debt as to you, but not as to your brother.
Another positive aspect of filing for bankruptcy is the automatic stay. The automatic stay, as the name suggests, is an order of the bankruptcy court that goes into effect as soon as you file your bankruptcy case. The automatic stay is very broad and prevents creditors from doing many things to collect a debt from you, such as calling you, writing you a collection letter, suing you, and other actions. The automatic stay remains in effect to protect you until the bankruptcy court issues your discharge. The stay continues in effect as to property of the bankruptcy estate until the case is closed (in most cases, shortly after the discharge is issued).
The change in your credit score as the result of a bankruptcy filing is mixed. Usually, a bankruptcy filing will push your score to the bottom of the proverbial barrel. This can be a great concern for many people. However, you can slowly rebuild your credit after the bankruptcy and increase your credit score to a point higher than before you filed for bankruptcy. Although a bankruptcy will stay on your credit report for many years, it many times will have a net positive effect in the end.
A negative consequence of filing for bankruptcy is that everything you file with the court, including all of your bankruptcy schedules, which contain your personal financial information, can be accessed by the public.
In reality, unless someone has a reason to know you're in bankruptcy, the chances of someone other than a creditor accessing the information is very small. A lack of privacy is the price one pays for the great benefit provided by a bankruptcy. For some individuals, the lack of privacy may be a deal breaker. However, in comparison with the result you get with bankruptcy, the privacy factor can seem far less significant.
NOTE: Very sensitive information is protected. For instance, you can only include:
- the last four digits of the social-security number and taxpayer-identification number;
- the year of an individual's birth;
- a minor's initials; and
- the last four digits of a financial-account number.
Possible Loss of Property
Probably the most negative consequence of bankruptcy is that you may lose some of your property to the bankruptcy trustee.
I must stress the word "may"! If you are able to successfully exempt all of your property the trustee will not be able to sell it. Even if you cannot exempt all of your property, it may not be worth it for a trustee to sell your property. For example, if it is going to cost $1000 to auction off a car that is worth $850, the trustee is likely going to let you keep the property. The trustee will only sell your non-exempt property if he or she believes that a net gain can be obtained.
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this article does not create an attorney-client relationship between the author of this article and the user or browser.
Updated May 2017 Carron Nicks