What Is the Downside of Filing for Bankruptcy?

Bankruptcy filers can overcome post-filing debt and credit challenges with careful planning.

By , Attorney

Bankruptcy certainly helps people get out of debt, but there are some "cons" or downsides to filing for bankruptcy that you'll want to know before jumping in. This article focuses on lesser-known negative consequences of filing bankruptcy and answers common questions, including:

  • Can filing bankruptcy hurt you?
  • What are the disadvantages of filing for bankruptcy?
  • How damaging is a bankruptcy filing?

You'll also learn some of the cons of declaring bankruptcy, such as:

  • you might not qualify
  • bankruptcy might not erase all of your debt
  • you might lose property or have to pay to keep it, and
  • you'll likely experience challenges after bankruptcy.

If you're interested in spotting potential issues in your case quickly, our 10-question quiz can do that and help you decide if you need a bankruptcy lawyer.

Bankruptcy Downsides You'll Want to Know Before Filing

The downsides of filing for bankruptcy differ depending on whether you file for Chapter 7 or 13. If you're unsure which chapter would be best for you, use the links in the box above to get up to speed quickly.

Downsides of Filing for Chapter 7 Bankruptcy

You might not qualify.

People with substantial income usually can't wipe out debt in Chapter 7. You'll take the Chapter 7 "means test" to determine if your income is low enough to qualify.

If it's too high, Chapter 13 bankruptcy might be an option if you make enough to cover the monthly amount. Learn about calculating your Chapter 13 plan payment,

You might lose some property.

Filers can keep "exempt" property needed to work and live. Your state determines the exemptions available to you, and anything that a bankruptcy exemption doesn't cover gets sold for the benefit of creditors.

Luxury items, such as recreational vehicles, collectibles, expensive sporting equipment, and rental property, are all things you might lose in Chapter 7. Learn more about keeping property in bankruptcy using state exemption laws.

You might lose your business.

When you file for Chapter 7 bankruptcy, you'll need to protect the value of your business interest with a bankruptcy exemption. Otherwise, you'll lose it. However, you might not need to exempt much property if you're a sole proprietor with a service-oriented business. Learn more about small businesses in Chapter 7.

You could lose money from your bank account.

If you do all your banking at the same institution, you could lose money from your checking or savings account when you file for bankruptcy. Most banks have a "setoff" right that allows the institution to withdraw funds to pay your outstanding car payment, credit card balances, and other loans.

You should be able to avoid this problem by keeping your balance low when you file. Find out more about bank accounts in bankruptcy.

You might still owe money after Chapter 7.

Bankruptcy erases or "discharges" many types of bills, and you might be able to eliminate all of yours. But bankruptcy doesn't erase everything. You'll have to repay nondischargeable debts like recent tax balances, child support, alimony, and student loans after bankruptcy. Learn when you can get rid of student loan debt in bankruptcy.

Your cosigner will be responsible for paying your debt.

Your Chapter 7 case will erase your responsibility to pay a dischargeable debt, but not your cosigner's obligation. Here's how it works.

Suppose a friend helped you rent a place to live by signing a lease, but you fell behind on the payment, and now you're being evicted. Filing for Chapter 7 bankruptcy will delay your eviction temporarily and wipe out the back rent. However, your friend will remain responsible for paying the amount due on the cosigned lease.

Your credit score will likely drop.

Even though you'll likely experience a drop in your credit score after bankruptcy, many people's scores improve faster than if they didn't file for bankruptcy. Not only will you stop accruing late payments, delinquencies, and repossessions, but you won't have to wait years for charged-off debts to fall off your report.

Also, you can start rebuilding your credit right away. It's even likely that you'll receive offers for credit cards shortly after your bankruptcy case closes.

You'll have trouble renting an apartment.

You'll want to secure a place to live before filing for bankruptcy because many apartment complexes and properties handled by property management managers won't rent or lease to you until a year or two has passed. Many filers have to stay with friends and family or take the time to find a sympathetic landlord.

Learn more things you should know before filing for bankruptcy.

You could have trouble opening a bank account.

Many bankruptcy filers find that they don't meet the credit standards necessary to open a bank account after bankruptcy. This problem often arises when a filer discharges an overdrawn balance in Chapter 7, and the bank closes the account.

A simple way to avoid this problem is to ensure you have an account or two open and in good standing before filing. Either keep a minimal balance or open the account in an institution other than where you have your car loan or credit card accounts to avoid an setoff problem.

But remember, you must protect the balance in the account on the day you file with an exemption to keep the funds. The Chapter 7 bankruptcy trustee appointed to oversee your case won't deduct uncleared amounts.

You'll have to wait to finance a home and car.

With a bankruptcy on your credit report, a bit of time will need to pass before you'll qualify for a mortgage or car loan. You'll likely wait at least a year to two for a decent interest rate on a car loan, and two to four years before qualifying for a mortgage. Learn more about getting a mortgage after bankruptcy.

You won't be able to file another Chapter 7 bankruptcy for eight years.

You won't want to file for bankruptcy if you're still incurring medical bills or dealing with another ongoing financial challenge because you must wait several years between bankruptcy discharges. For instance, eight years must elapse between Chapter 7 discharges.

Find out how the discharge waiting period varies depending on the previous chapter and the chapter you'd like to file.

Chapter 7 will remain on your credit report for ten years.

Although ten years is a long time, the overall impact will fade. You can expect your relations with lenders, landlords, and banks to be affected most significantly during the years immediately following the bankruptcy.

Downsides of Filing for Chapter 13 Bankruptcy

Chapter 13 takes a long time to complete.

You'll spend three to five years in Chapter 13 instead of the four months the average Chapter 7 filer is in bankruptcy.

You must pay back creditors.

The primary difference between Chapters 7 and 13 is that in Chapter 13, you repay creditors. Some debts must be paid fully, like overdue support obligations and newer tax debt. You'll pay an amount you can afford on other debts, like credit card balances, medical bills, and personal loans.

Learn what you'd pay in Chapter 13.

You might have to pay to keep your property or business.

You'll use the same bankruptcy exemptions used by Chapter 7 filers to protect property. But because Chapter 13 trustees don't sell assets, you'll pay your creditors the value of the nonexempt property through the Chapter 13 plan.

If you have a lot of nonexempt equity, you might not earn enough to afford Chapter 13. For instance, suppose you have $120,000 of nonexempt equity in a home you'd like to keep. You'd pay $2,000 monthly to creditors, plus other required amounts and the trustee's fee.

You'll likely struggle to stick to your budget.

Chapter 13 files must pay all of their monthly "disposable income" to creditors for three to five years, which doesn't leave much for emergencies and unexpected expenses. It isn't an easy process if you need to finance a new car, major appliance, or something else. You'll have to get permission from the bankruptcy court.

Chapter 13 remains on your credit report for seven years.

Even though your credit report will reflect your bankruptcy filing, the impact is less in Chapter 13 because you'll have made an effort to repay creditors.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

United States Courts Bankruptcy Forms

Chapter 7 and 13 Bankruptcy Forms

Chapter 7 Bankruptcy Document Checklist

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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