Why File for Bankruptcy?

A common inquiry made to bankruptcy lawyers, financial planners, accountants, and even credit counselors includes “why file for bankruptcy?” In short, most legal and financial advice will suggest filing for bankruptcy only if a debtor has no other viable options to address outstanding debt obligations. With this being said, bankruptcy is not a guaranteed method of alleviating all outstanding debt issues, and in turn, debtors should be informed about the bankruptcy process prior to considering it as a viable means of addressing debt issues.

Bankruptcy as a Fresh Start

Commonly, bankruptcy has been touted as a means of obtaining a fresh start financially. This is true, albeit only in case-specific circumstances. For example, most debtors must elect to file under either Chapter 7 or Chapter 13. In each case, the debtor may not fully be able to obtain a “clean slate” or “fresh start” based on several items, such as the nature of the debts owed, the amount of income earned, and other case-specific factors.

Specifically, unsecured debts are dischargeable under Chapter 7, but most secured debt obligations and other non-dischargeable debts (such as child support, alimony, tax debts, and certain civil judgments) must be repaid, regardless of bankruptcy. While repossession of the asset underlying a secured debt may alleviate most secured debt obligations, as mentioned above, certain debts simply must be repaid.

Likewise, in Chapter 13, debtors must ultimately repay the bulk of debts owed, both secured and unsecured debts. However, there are limited opportunities for discharge under Chapter 13, but in practice, the Chapter 13 process entails repayment over a period three to five years. Clearly, this prolonged process is not the fresh start most debtors envisioned at first.

However, even though bankruptcy does not necessarily provide a fresh start from the outset, it does however provide many incentives and protections to take action to obtain the fresh start. For example, an automatic stay provision prevents creditor collection attempts during and following the bankruptcy process, giving debtors significant relief from collections actions, theoretically allowing for repayment or discharge of certain debts. Likewise, oversight from trustees and the courts can generate a repayment plan, which if followed, will ultimately provide a fresh start.

Getting Legal Help with Filing for Bankruptcy

In short, filing for bankruptcy can provide debtors without other options a favorable means of addressing outstanding debt issues, while providing protections to prevent incurring future debts, while also allowing for repayment of current expenses and unpaid debts. Ultimately, the benefits of filing for bankruptcy will be subject to the case-specific considerations of each individual’s financial status. For this and other reasons, having competent insight from dedicated legal counsel, in the form of a bankruptcy attorney, is an essential step toward determining the potential benefits and future implications of a bankruptcy filing.