Downsides Of Declaring Bankruptcy

Declaring bankruptcy may seem like the answer to your debt problems. Many view bankruptcy as a magic solution, a way to wipe debts clean, start fresh and build a better financial future. While bankruptcy can indeed prove important to helping you to eliminate debt, there are some significant downsides to declaring bankruptcy that you need to be aware of before you make the choice. 

Bankruptcy Downsides

The specific downsides to declaring bankruptcy van vary depending on which type of bankruptcy you declare. Drawbacks can include:

• The loss of assets: If you are eligible for Chapter 7 bankruptcy because you make below the median income in your state, or because you pass a means test demonstrating you cannot pay your debt and still have enough money left to live on, then you will have to have your non-exempt assets seized and sold by a bankruptcy trustee. This means that assets other than home equity and retirement accounts can be taken.
• The need to pay debts anyway: If you aren't eligible for Chapter 7, you get to keep your assets- but you won't walk away with a clean financial slate and no debts as some people believe happens in all bankruptcies. Instead, you will need to commit to a payment plan that can last between 3-5 years. During this time, you will need to make payments to a bankruptcy trustee who will then distribute the payments to creditors to take care of restructured debt.
• Not all debts go away: Some debts are not dischargeable in bankruptcy. If your debt problems are primarily caused by student loans, unpaid child support debts or tax debts, bankruptcy may not help you since these debts are not typically included in bankruptcies.
• Damaged credit: Bankruptcy can all but destroy your credit score, making it almost impossible to get a standard credit card, buy a home or take a car loan. While you can take steps to rebuild your credit over time, the bankruptcy stays on your record for 10 years. Further, many mortgage applications and other lenders will ask whether you have ever filed for bankruptcy when you fill out an application.

Getting Help

Before declaring bankruptcy, take the time to sit down with an experienced bankruptcy attorney. Your attorney can help you to understand all the drawbacks and can assist you in determining what type of bankruptcy, if any, is the best option for you given the nature of your debts, finances and assets.