Is Filing For Bankruptcy Bad
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In a Nutshell
Bankruptcy has gotten a negative reputation over the years. But there are many benefits to filing for bankruptcy that don’t get as much attention as the drawbacks. Depending on your situation, filing bankruptcy can sometimes be the best course of action.
Bankruptcy has earned a negative reputation over the years. You mayâve heard stories about people losing their property or believe that youâll never get credit again if you file bankruptcy. Because of these myths, many people think that filing for bankruptcy is bad. This is unfortunate because the truth is that filing a Chapter 7 bankruptcy is sometimes the best way to deal with overwhelming debt.
If you have high-interest ratecredit cards or payday loans, you may feel like youâre fighting a losing battle. Thatâs why bankruptcy laws provide protections for filers so they can get a fresh start without starting over from scratch. In this article, weâll look at some of the benefits and drawbacks of filing for Chapter 7 bankruptcy.
How Does Bankruptcy Affect Assets And Liabilities
Depending on how you choose to declare bankruptcy, your assets and liabilities will be affected in different ways. In a Chapter 7 bankruptcy, many of your assets are up for liquidation to pay your creditors with the proceeds. In Chapter 13, you retain assets while working on a repayment plan for your outstanding debts.
See how bankruptcy affects assets and debts in the following debtee categories.
Small Business Owners
For small business owners with lots of personal debt, bankruptcy may help them continue to stay in business. Its important to note that business debts arent alleviated with Chapter 7 or Chapter 13 unless youre a sole proprietor and are personally responsible for them.
- Chapter 7: For sole proprietors, business and personal debts can be wiped out in a single bankruptcy case. Youre not obligated to meet income requirements if your business debt exceeds your personal debt.
- Chapter 13: Your business assets arent liquidated, but only your personal liability for business debts can be wiped out. The business remains responsible for its debts.
Some business assets can be exempt from Chapter 7 bankruptcy filings. For instance, if your business is service-based and doesnt maintain equipment or significant inventory, you can likely continue to run your business after discharging business debts through bankruptcy.
Student Loan Holders
Your Assets Are In Jeopardy
When you decide to move forward with declaring bankruptcy, you need to meet with a Licensed Insolvency Trustee. They are the only people licensed in Canada by the Superintendent of Bankruptcy to carry out consumer proposals and bankruptcies.
Theyll take into account your income, assets, and debt to help discern if youre a prime candidate for bankruptcy. Theres a reason why: declaring bankruptcy needs to be worthwhile. Most consumers end up losing their RESPs and tax refunds , contributions made to their RRSPs in the past 12 months, and most of the equity in their homes as Trustees liquidate assets to offset debt.
Read Also: What Are The Different Bankruptcy Options
What Happens To Your Credit When You File For Bankruptcy
Your payment history is the most important factor in determining your credit score, and filing bankruptcy means that you won’t be paying covered debts in full as you initially agreed.
As a result, filing bankruptcy can have a severely negative impact on your credit score. A Chapter 7 bankruptcy will remain on your credit reports and affect your credit scores for 10 years from the filing date a Chapter 13 bankruptcy will affect your credit reports and scores for seven years.
Regardless of which type of bankruptcy you choose, lenders will be able to see it on your credit reports in the public records section and it’s likely to be a factor in their decision-making. Once you’ve completed the legal process, it will show that both the bankruptcy and the debts included in it have been discharged.
If you apply for credit, lenders may not approve your application unless the bankruptcy has been discharged. Even then, you may have a hard time getting approved for certain types of loans. If you do get approved, you may face steep interest rates and other unfavorable terms.
You Could Be Neglecting The Real Issue
Most people in their 20s obtain that first real job and first grown-up apartment. In doing so they have to learn how to make the sacrifices required to live within their means. They are developing the skills and discipline required for becoming responsible, self-sufficient adults. Those who learn how to manage money during this time gain the ability to build the savings required to make a down payment on a future home, buy cars without the help of a lease or high-interest loan, and eventually afford the joys that financial freedom offers, such as frequent vacations or early retirement.
If you find yourself struggling with managing your finances, with your debt snowballing into more and more debt, the real issue is not where you are but how you arrived there. It could be that you have been spending beyond your meansbut there can be other causes, such as the widespread job losses brought on by the pandemic.
It’s important to stand back and figure out both how you got into your current predicament and what can be done to begin to climb out of it. Taking a second job for more income , debt consolidation, eliminating unnecessary spending, and paying down your debt little by little are all ways to help you readjust your finances and avert bankruptcy.
Read Also: How Do I Find My Debt Collectors
If Filing For Bankruptcy Improves Your Net Worth How Bad Is Filing For Bankruptcy
In a Chapter 7 bankruptcy, the bankruptcy trustee is often looking for assets to take. There is no dismissing your Chapter 7 case if you get into trouble, and the home you said was worth 100,000 is worth 200,000. People most often only tend to have serious problems when they forget and fail to disclose:
They often could have kept property, but because of non-disclosure or creative accounting practices, they lose the property. In Chapter 13, you can dismiss a case if you encounter problems. You cant dismiss a Chapter 7 case just because the trustee found out you gave your new car to your mother just before filing.
It Crushes Your Credit Rating
When you file for bankruptcy, youre giving your credit rating and a death sentence for the next six to seven years, or longer depending on how long it takes to obtain your discharge or if its your second or third bankruptcy.
Once bankruptcy is noted on your it becomes extremely difficult to qualify for new bank loans, credit cards, car loans, mortgages, and other credit products at reasonable interest rates. While avoiding credit so as not to end up in debt again might seem like a good idea, living long-term without any form of credit isnt reasonable for most Canadians.
For instance, if youre at a life stage where youre planning to secure a mortgage for a new home, or even get through credit checks to rent a property or obtain new employment, bankruptcy will negatively affect your chances of getting through this checkpoint. Even years down the road, creditors may see you as high risk, often asking on applications if youve ever declared bankruptcy.
Recommended Reading: How Do You Get A Copy Of A Bankruptcy Discharge
How To File For Bankruptcy
Yeahit’s going to feel like you’re digging up and showing off every bit of private information you’ve ever had. Really, the only upside is they dont ask for that awkward eighth grade yearbook photo.
Your Credit Report And Multiple Filings
If youve filed at least two bankruptcies, theyll appear on your credit report for several years. They might even overlap, meaning both bankruptcies appear on your credit report. A completed Chapter 7 case can remain on your credit report for up to 10 years, and a completed Chapter 13 case can stay on your credit report for up to seven years.
Here are some potential credit consequences of multiple bankruptcy filings:
- The loss of an automatic stay. It could result in the loss of whats known as an automatic stay. An automatic stay prevents certain creditors from trying to collect debts from a bankruptcy filer.
- A lower credit score. It will keep your credit score down as long as either bankruptcy or both bankruptcies appear on your credit report.
- Difficulty qualifying for credit. It likely will make it harder to qualify for credit, such as a mortgage or credit card.
- Other issues. It might create problems when you try to rent an apartment, get a job or buy insurance.
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Other Debt Relief Options
Bankruptcy is considered a last-resort option when it comes to debt relief. Fortunately, alternatives are available. They include:
- Seeking help from a consumer credit counselor. A consumer credit counselor can develop a debt management plan designed to eliminate some or all of your debts. In many cases, consumer credit counseling is offered by nonprofit organizations.
- Taking out a debt consolidation loan. The goals here are to combine several debts into a single monthly payment and slash higher-interest debt.
- Contacting a debt settlement company. For-profit companies typically offer debt settlement programs. These programs can help you chip away at your debts through negotiation with your creditors. However, debt settlement programs come with risks and are usually a last resort.
Chapter 7 Wipes Out Debt Quickly
There are many different types of bankruptcy, . Itâs the one most individuals and married couples file. One reason itâs popular is that itâs the quickest. When you file bankruptcy under Chapter 7, you can get a bankruptcy discharge in as little as 4-6 months. A discharge is the court order that wipes out certain debts.
Most unsecured debt can be discharged in Chapter 7. Thatâs debt thatâs not tied to property. It includes credit card debt, medical bills, personal loans, old utility bills, some old income tax debts, payday loans, and old rent or lease payments. You arenât required to pay back any of the debts that are discharged in your Chapter 7 case. When you receive the bankruptcy discharge, any debts that are discharged are gone forever. Itâs illegal for creditors to try to collect a discharged debt.
Read Also: Can You File For Bankruptcy During A Divorce
You Do Not Have Important Property To Lose
It is important to take stock of what you own because you must list those assets when you complete the bankruptcy paperwork. Check out the exemption list for your own state here.
If you have property you dont want to lose, reconsider filing for Chapter 7 bankruptcy because it will be at the risk of liquidating your assets.
Every state has different exemptions, which includes the property you get to keep after your debts are forgiven. Essential items such as furniture, clothes, and a vehicle that you need for work and school are typically exempt, but luxury items are not.
Luxury items can include designer watches, antiques, expensive vehicles, boats, and recent credit card balances incurred for luxury items.
Is Filing For Bankruptcy A Bad Idea
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Also, what is the downside of filing for bankruptcy?
Filing Bankruptcy: The ConsThe first downside to filing for bankruptcy is that despite helping you out of debt, it will not eliminate all your debts. The following are some of the debts that will remain after filing for bankruptcy: Your most recent back taxes. Most student loans.
Subsequently, question is, is declaring bankruptcy worth it? If youre looking to erase only $2,000 worth of credit card debt, bankruptcy isnt worth the expense. Bankruptcy also might not be the best route if your creditors are willing to reduce what you owe by 30 to 60 percent because you offer them an immediate lump-sum payment.
Then, why you should not file bankruptcy?
#2 Your Debt is Mostly Tax DebtNot all debts are created equal. Certain debts, even in bankruptcy, are not discharged or eliminated through the bankruptcy process. Most taxes fall into this category. Certain taxes like payroll taxes a business owner owes will never go away.
Can filing bankruptcy be a good thing?
For many people, filing a Chapter 7 bankruptcy case is a good thing. They get rid of their debts, keep their money, and keep their property. Watch videos made by people who have used Upsolves no costbankruptcy forms to file Chapter 7. They got rid of their debts and you can too.
Read Also: What Are The Different Types Of Bankruptcies
Strategy To Use In A Second Filing
If youre thinking about filing a second bankruptcy, its important to develop a plan to make the process as smooth as possible. Here are five steps to consider taking:
Your Life Will Vastly Improve By Filing For Bankruptcy
Chapter 7 bankruptcy is the most common type of personal bankruptcy because you no longer have to pay the bills that are weighing you down. But before pursuing bankruptcy protection, think about how it may impact your life.
Its hard to know for sure, but youll want to consider the psychological impact it can have.
Ask yourself some key questions. Do you think youll feel happy, guilty, depressed, or relieved? Will you feel emotionally and financially prepared to rebuild your life so you dont have to go through this again?
Bankruptcy filings are a matter of public record, so youll need to be OK with the possibility that nosey people can find out if they really want to check.
Read Also: How Much Money To File Bankruptcy
Can I File A Different Chapter Of Bankruptcy After My First Bankruptcy
In the instance that you would like to file a different type of bankruptcy the second time around, the rules will differ:
Chapter 7 then Chapter 13: Consumers must wait four years from the original filing date of a successful Chapter 7 case to be eligible for a discharge under Chapter 13 in a second bankruptcy.
Chapter 13 then Chapter 7: Consumers must wait six years from the original filing date to be eligible for a Chapter 7 discharge. Exceptions may be granted on a case-by-case basis if 70% of the debt from the Chapter 13 repayment plan has been satisfied or you attempted the plan in good faith.
It’s Possible To Recover From Bankruptcy With Time
As time passes following a bankruptcy, its negative effect on your credit score lessens on its own until its entry is automatically removed from your credit report.
Rather than simply waiting for a bankruptcy to stop harming your credit, however, you could be taking steps to improve your credit scores. The key to this is establishing a pattern of on-time monthly payments that are reported to the three national credit bureaus . While that might seem impossible if you cannot qualify for new loans or credit, here are options that can help you do exactly that:
Before taking out either a secured credit card or a credit-builder loan, confirm with the lender that your payments will be reported to all three credit bureaus. As long as they are, and as long as you make every monthly payment on time without fail, both products will tend to promote improvement in credit score.
As you allow time to pass and work to rebuild your credit score after a bankruptcy, you’ll eventually begin to receive offers for credit cards and loans. Don’t take on debt you don’t need or can’t handle, but consider accepting one or more of these, even if their interest rates are high. Using them prudently can help you build up your credit even further. Eventually, you’ll be able to put your bankruptcy, and its difficult consequences behind you.
Also Check: America’s Debt Count
Is Bankruptcy The Best Way To Get A Fresh Start
The answer to this really depends on you. Chapter 7 and Chapter 13 bankruptcy have helped many people get the fresh start they deserve. But itâs not the right choice for everyone. If youâre not sure where to start on your journey to debt relief, consider scheduling a free consultation with a at a nonprofit agency.
A credit counselor can lay out your debt relief options, help you budget, and support you in deciding how to best tackle your debt. This could be through bankruptcy or other debt relief options like debt consolidation, a debt management plan, or debt settlement.
If youâre pretty sure bankruptcy is the best option for you, you can use Upsolveâs free filing tool to complete your Chapter 7 forms. If you have questions and need some legal advice, you can contact a local bankruptcy lawyer to see if they offer a free consultation. There are also legal aid organizations in most areas that provide free or low-cost legal help for low-income individuals.