Pros and Cons of Bankruptcy

Bankruptcy refers to failure of an individual or organization in paying financial liabilities to a creditor or a financial institute. Bankruptcy cases are handled in special courts for bankruptcy. The steps for bankruptcy filing may differ from one state to another. Certain bankruptcy laws are imposed in order to help an individual in debt or a troubled company by liquidation of the assets and/or creating an easy repayment option.

Speaking about the types of bankruptcy, there are four types, namely, Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Each of these is named with reference to the chapters in the United States Bankruptcy Code. A debtor, whether individual or company, should pass certain criteria for filing a particular type of bankruptcy. Though declaring bankruptcy is considered as one of the effective steps for clearing out debt, there are certain advantages and disadvantages of bankruptcy.

The terms and regulations of bankruptcy filing are different based on various factors. Hence, before filing bankruptcy cases, debtors should opt for credit counseling in order to have an idea about the basics of bankruptcy. An experienced bankruptcy lawyer is the best person to consult and seek advice regarding the payment rules and regulations under the bankruptcy types. Let's take a look at the pros and cons of bankruptcy.

Pros of Bankruptcy

When we talk about personal debt management, very often bankruptcy is mentioned as a tool for coming out of debt. After the court accepts the bankruptcy petition, the debtor will no longer get collection calls from the creditor or financial institutes regarding payment of debts. The debtor is also exempted from wage garnishments, foreclosures and repossession.

Another benefit of bankruptcy is to get out student loans, if the debtor is no longer in a position to repay the debt. Majority of the bankruptcy laws impose exemption of homes, cars and other assets. Hence, declaring bankruptcy helps in securing the properties of the debtor. However, based on the bankruptcy type, there may be liquidation of the assets for repayment of the debts.

Cons of Bankruptcy

Bankruptcy is considered as one of the major negative events that an individual can experience during his/her lifetime. In fact, it is a life changing event that will remain for a long span. The debtor has to explain in front of the trustee or the judge about his/her current financial status. The debtor's name remains in the court records and there are chances that his/her name will appear in the newspaper. After bankruptcy, the debtor is no longer eligible to use credit cards.

A major disadvantage of filing bankruptcy is that it remains in the credit report for 7-10 years (depending on the bankruptcy type). Many a time, financial institutes and employees check for bankruptcy records prior to providing loans and/or jobs. Hence, it is difficult to obtain loans, insurance and even getting a job with a bankruptcy record. Also, not all debts are discharged after declaring bankruptcy. Under the chapter 11 and chapter 13 bankruptcy, a debtor is also liable to pay a portion of the debt through repayment plans.

Well! This is in brief about the pros and cons of declaring bankruptcy. Proper understanding bankruptcy pros and cons will help in determining whether it is the right step for you or not. While deciding, make sure that you compare the short term benefits and long term prospects of bankruptcy. This way, you can prepare yourself beforehand for the future effects of bankruptcy filing.