As with any legal process, bankruptcy is a complex issue with both positive and negative consequences. Anyone considering filing for bankruptcy should consider all the possible outcomes before taking this step. Whether one is considering a Chapter 7 straight bankruptcy or a Chapter 13 repayment plan case, consulting with a qualified consumer bankruptcy attorney is paramount to ensuring that the process runs smoothly and advantageously.
Before you schedule an appointment with an attorney, you can familiarize yourself with a few basic consequences for any bankruptcy case.
On a positive note, declaring bankruptcy typically results in discharge. Discharge is when a bankruptcy court hands down a permanent order that forever prevents creditors from collecting on debts you previously incurred. Credit card debt is one common form of debt that can be discharged by a bankruptcy court. Courts have decided that credit card companies can afford to take the financial hit of forgiving debt—the companies won't go out of business over an individual's debt. That individual will be much more productive if they aren't drowning in debt.
There are exceptions, such as recent tax liabilities and alimony and child support obligations. These debts are considered too important to wipe clean, but a Chapter 13 bankruptcy may help you establish more feasible payment plans. Furthermore, the discharge does not extend to real estate property. Therefore, any liens a home loan lender has on your house will remain in effect after bankruptcy. Consequently, lenders may foreclose on your home if you default on a loan.
Another positive aspect of filing for bankruptcy is the automatic stay. This feature is essentially a preliminary court decree. When the bankruptcy case enters the court, it immediately protects the bankruptcy filer from creditors seeking to collect on a debt. Consequently, creditors may not call you on the phone or send collection notices in the mail.
In most cases, the automatic stay remains in effect until the bankruptcy court decides which debts will be wiped clean and which debts must be honored. This process is known as issuing a discharge. However, there are other instances in which an automatic stay will be lifted. An automatic stay that protects your property, for instance, might be lifted if the value of the property is less than the debt owed. Divorce proceedings may also complicate what the automatic stay protects.
A bankruptcy filing typically depresses a person's credit score. Also, bankruptcy won't erase the history of your past debts, even if the debt itself is discharged. Lenders will take all this as a sign that you're a risky borrower, and you could end up with high-interest rates for loans—if you even qualify for them at all.
While this is a legitimate concern, one may slowly rebuild their credit after the bankruptcy. The bankruptcy will remain on your credit report for many years, but the net effect of bankruptcy on credit scores is typically positive. That's because, while bankruptcy takes a bite out of your credit score, as does growing debt. If bankruptcy is your only way to stop debt from growing, it may be worth taking the hit to your credit score, to build it back up over time.
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. That means friends, family, employers, and clients could find out the details about how much money you owed to who. For some individuals, this is a deal-breaker.
For others, the benefits of declaring bankruptcy outweigh the privacy factor—especially because certain sensitive information is protected. For instance, only the last four digits of Social Security and taxpayer-identification numbers are public, and any minors involved will be listed by their initials.
Possible Loss of Property
Those who declare bankruptcy may lose property to the bankruptcy trustee. The point of filing for bankruptcy is to have the court step in and decide how much debt you can afford to pay off, and how much should be forgiven. If you own property with significant value—such as luxury cars—you may be forced to sell that item to pay off some debt. However, if you can successfully exempt your property, the trustee will not be able to sell it.
Even if you are unable to exempt some properties, it may not be economically advantageous for your trustee to sell a particular item out from under you. For example, if it costs $1,000 to auction off a car that's worth only $850, the trustee is likely going to let you keep that vehicle. As mentioned above, this point becomes complicated when a piece of property, such as a home, has been put up as collateral. That gives the creditor greater leverage in attempting to seize the property.