Key Disadvantages of Bankruptcy
Without fully understanding the disadvantages of bankruptcy, a lot of people will file for the “protections” it offers. In most cases, filers believe that bankruptcy clears the slate. Without a complete knowledge of bankruptcy provisions, a lot of borrowers actually find themselves in a deeper financial rut than before they filed. After all, as a last resort, bankruptcy was created to penalize everyone involved, including you. With that in mind, you should have a thorough understanding of the disadvantages of bankruptcy before you file.
As a leading disadvantage of bankruptcy, the fact that a discharge will not always clear all debt is one that is often overlooked by borrowers. That’s right; in some cases, even after a trustee has liquidated your assets and repaid creditors, you could still owe others whose debt was exempt from the bankruptcy discharge.
Another big disadvantage of bankruptcy is that you lose property. This could include, but is not limited to, real estate, automobiles, investments, and other personal belongings. In most cases, property also includes your rights to future inheritances.
When deciding to file for bankruptcy, particularly Chapter 7, you need to be 100% certain of your decision as you cannot withdraw from your commitment. This means that once a discharge has been granted, you cannot avoid or repay the debt, resulting in damaged credit for the next seven years. With a damaged credit rating, most lenders will not consider any credit applications you make, even if you have the means to repay such credit several times over.
Debtors are able to file for Chapter 7 for nearly any amount of debt, however a minimum of six years must elapse before a debtor can file once again.
Another often-overlooked disadvantage is that bankruptcy will take a mental and physical toll on filers. Since a discharged bankruptcy creeps up regularly over time, a discharge can actually have traumatic effects on filers.
For many, the stress of bankruptcy leads to marital problems, including divorce. In some cases, this can deepen the financial strain of a discharged bankrupt, leaving them feeling even more defeated or beaten. Remember, six years must pass before the next bankruptcy filing. Relationship stress can cause problems with social circles and not surprisingly, bankruptcy also increases the likelihood of alcohol abuse. The feelings of loss are rather strong in those who have gone bankrupt.
Due to the mental trauma, it can become extremely difficult for you to manage normal family and social life. There can be serious differences between spouses. The persons will also find it difficult to get along with friends because of feelings of shame and guilt.
With the disadvantages of bankruptcy in mind, there are actually some advantages for borrowers with tremendous debt. This includes the mandatory credit counseling course that must be undertaken at least three months prior to the filing. This small requirement can actually help some debtors better manage their finances and find ways to avoid bankruptcy. In cases where bankruptcy is truly used as a last resort and where asset values fall short of debt owed, Chapter 7 might be the better option. However, bankruptcy should only be used as that: a last resort.
June 30 2009 12:02 am | Finance