What Are the Consequences of Bankruptcy?
As with any legal process, those contemplating filing for bankruptcy should consider the possible positive and negative consequences before taking the plunge. 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.
On a positive note, declaring bankruptcy typically results in a discharge. This is when a bankruptcy court hands down a permanent order that forever prevents creditors from collecting on debts you previously incurred. But there are exceptions, such as recent tax liabilities, and alimony and child support obligations. 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, which is a preliminary court decree preventing creditors from actively attempting to collect debts from you during bankruptcy proceedings. Consequently, creditors may not call you on the phone or send you collection notices in the mail. The automatic stay remains in effect until the bankruptcy court issues a discharge.
A bankruptcy filing typically depresses a person's credit score. And while this is a legitimate concern, one may slowly rebuild his or her credit after the bankruptcy, ultimately boosting credit scores to higher than pre-bankruptcy levels. And although a bankruptcy stays on your credit report for many years, the net effect on credit scores is typically positive.
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. 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, you can use solely the last four digits of your Social Security number and taxpayer-identification number, and you may list minors by their initials.
Possible Loss of Property
Those declaring bankruptcy may lose property to the bankruptcy trustee. However if you are able to successfully exempt your property, the trustee will not be able to sell it. And 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.
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