The Advantages and Disadvantages to Filing for Bankruptcy
There are many benefits to bankruptcy. Many people who qualify for bankruptcy could benefit from the many advantages, but choose not to because of the fear that their credit score will never recover. Having a fresh start for many outweighs the potential downside to bankruptcy's disadvantages. A fresh start will allow you to move forward and accomplish your financial goals instead of drowning in debt.
Key considerations include whether you can actually discharge some or all of your debts and whether you will lose any assets from the filing. Weighing the pros and cons of declaring bankruptcy usually requires the help of a knowledgeable bankruptcy attorney.
Detroit bankruptcy lawyer Andrew Steiger can help you understand the advantages and disadvantages to filing for bankruptcy and whether you should choose bankruptcy as an option to resolve debt problems. Deciding when to file bankruptcy is a big decision and you should seek professional advice to prevent problems resulting from improper filing. If bankruptcy is not your best option, I will let you know.
How Does Chapter 7 Work?
Individuals may file Chapter 7 with the bankruptcy court in the jurisdiction of their federal court. Generally, once a petition is filed an automatic stay goes into effect to stop creditor collection and enforcement actions. This is the case whether or not a debt will be discharged and whether the debtor has assets to repay creditors. The court will then sort through the petition, inform creditors of the action, and determine how much each creditor should be repaid based on the debtor's assets and type of debts. Once completed, the debtor will know which debts are discharged and which are not. A filer is not personally liable for repayment of discharged debts, meaning a creditor cannot collect on the debt unless they have a security interest in the property (like a mortgage on a home or car).
Advantages to Filing for Bankruptcy
Potential Improvement in Credit Score
Once bankruptcy is filed and completed, discharged debts and related missed payments are no longer a factor in the credit score. A bankruptcy filing is on the credit report for 10 years, but this is not the only factor. Individuals looking at bankruptcy must consider the impact of old debts and missed payments relative to the 10 year bankruptcy. Credit companies do not want debtors to know that their credit scores will improve if properly managed because the debt to asset ratio improves, and there likely is more income available to pay regular living expenses. By making payments on time after bankruptcy, credit scores will improve after bottoming out.
Creditor enforcement is often very stressful as unpaid creditors seek to garnish wages or seize bank accounts or assets. Secured creditors may foreclose or repossess a home or car. The automatic stay in bankruptcy generally stops most creditor actions (except for child support payments) in cases where an individual has not previously filed bankruptcy. If there are prior filings, the filer must file a motion or request the court to grant an automatic stay. The automatic stay allows a filer to take a deep breath and focus on a fresh financial future as creditors have to stop collection activities and wait to see if the debts will be discharged and if they will receive any payments from the bankruptcy estate.
Discharge of Debts
The goal of Chapter 7 bankruptcy is to discharge debts and eliminate any creditor collections of those debts. Dischargeable debts are no longer personally enforceable against the debtor, so if a creditor does not have an enforceable security interest in the property, then a creditor cannot pursue the debtor's assets after bankruptcy. Cases where there may be a security interest are limited, and may include a home or auto mortgage and possible enforceable tax liens.
Exemptions Protect Property
For many people, retaining assets is very important. In a liquidation bankruptcy under Chapter 7, the immediate elimination of dischargeable debts is available to all of those who qualify to file under the means test. In a sense, anyone could file and get a discharge. The bankruptcy code protects creditors by requiring the debtor to give creditors any remaining assets that are not exempt. The debtor gets to keep exempt assets. It is critical to know what debts are exempt prior to filing to ensure that the debtor can keep certain assets and is aware of the assets that will be turned over to the trustee to give to creditors.
Exemptions are based on the type of asset and value of assets. Exemptions are available under the federal code and state law, if state law allows for exemptions. Michigan law provides for Michigan bankruptcy exemptions that are generally favorable relative to the federal bankruptcy exemptions. There is no total overlap, so each set must be reviewed. Exemptions protect important asset classes, including a car, home, household furnishings, retirement accounts, etc.
Can Keep Post-Bankruptcy Filing Income
Once the bankruptcy petition is filed, the assets belonging to the bankrupt estate are set. Income earned after the filing is generally not part of the estate and is not available to pay debts listed on the bankruptcy petition. For other debts like child support, those debts will continue and payments need to be made.
Disadvantages to Filing for Bankruptcy
Impact on Credit Score
Impact on credit score is initially negative due to the bankruptcy filing. Credit counseling courses may provide an good answer to how far it may fall, but after the initial drop, if credit is handled timely, the credit score should increase. Going forward, while work will need to be done, improving your credit score is likely.
Ability to Obtain Credit Cards
Credit card companies will initially be wary about extending credit to borrowers who have a bankruptcy on their credit report. Interest rates will be higher and credit limits will be lower. Credit card companies may also require a deposit. Borrowers will find it difficult to make big purchases.
Over time, however, a filer who makes timely payments will see that this helps their credit score and credit companies will be willing to increase their credit limit. This makes sense because the filer cannot file another Chapter 7 bankruptcy within a certain number of years. This gives creditors comfort that they will be able to enforce collections if necessary, even though this is not ideal. If the petitioner's income is steady and payments are made, credit lines will increase over time.
Ability to Get a Mortgage or Loan
It may be a few years before secured lenders are willing to make a home loan to a filer who has completed a Chapter 7. Depending on one's means, saving for a down payment is not unreasonable and could speed up the process. For an auto lender, terms may not be very good initially, but there may be lenders available knowing that the new loan cannot be discharged in a bankruptcy.
Landlord's May Be More Critical
Depending on the reason for the bankruptcy filing, a landlord may be critical of an application that includes a bankruptcy on a credit report. On the other hand, a landlord would know that the filer cannot file for another bankruptcy, so any debt would be enforceable. Another point is that the debtor should not have any additional creditors garnishing wages, so there will be more money available to pay the landlord on a regular basis. Debtors should expect to pay the maximum deposit allowable by law and discuss the bankruptcy up front to ease a potential landlord's concerns.
Tax Refunds May Be Seized
For tax refunds for part of the year that relates to before the bankruptcy filing, the amount would be considered part of the bankruptcy estate and available to creditors if no bankruptcy exemption is available to protect the value of that asset.
Loss of Property to Bankruptcy Estate
In Chapter 7, the debtor's property at the time of the petition becomes the bankruptcy estate. This estate then is available to satisfy creditor claims, subject to the exemptions. The exemptions are published so anyone filing will have an idea of whether they can keep the property. If the value is close to the limit, the trustee may challenge the value depending on what type of asset is available.
Employers May Be Skeptical
New employers may review credit reports and notice the bankruptcy filing. In most cases, this will not affect the employer's decision and probably is an issue immediately following a bankruptcy. Employers may be concerned that the prospective may not be financially responsible, but when handled up front this should not be a concern.
Non-Dischargeable Debts Will Continue
Certain debts will continue after bankruptcy and cannot be discharged. Typical examples include child support, alimony, student loans, etc. The type of loans is defined by statute, so you can determine if the loan is dischargeable prior to filing. If you have a combination of dischargeable and non-dischargeable debts, it may still make sense to file in order to free up cash to pay down non-dischargeable debts faster.
Weighing the Pros and Cons of Bankruptcy
Anyone considering bankruptcy must weigh the pros and cons prior to filing. Other options like a payment plan or debt consolidation may make sense if the debt can be paid off in an organized manner. This usually requires all creditors to accept a plan to avoid independent garnishments by each creditor. If you have questions or would like to discuss filing bankruptcy, contact Detroit bankruptcy lawyer Andrew Steiger for a free consultation at (248) 259-6367 or email him