The Pros and Cons of Filing For Bankruptcy

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Understanding Bankruptcy

What does it mean when an individual or business files for bankruptcy? Bankruptcy is a legal process where a debtor declares they can’t pay their debts to creditors. This process gives people and businesses a fresh start by forgiving the debt. However, the creditor also gets a portion of the debt repaid through the liquidation of the debtor’s assets.

What You Need to Know About Filing for Bankruptcy

Contrary to what some people imagine, bankruptcy isn’t simply a result of poor decision-making. The harder the economy falls, the higher the bankruptcy filings. For instance, the Great Recession recorded 1.6 million bankruptcy cases in 2010.

Declaring bankruptcy may be the only lifeline left for an individual or business in severe debt. However, you’ll need to select the right one to file a successful case. You’ll also need to meet specific requirements to qualify for each type.

The Purpose of Bankruptcy

If you’ve been in business before, there are times when customers are nowhere to be found. If you’ve been an employee before, you know the chance of losing your job is always there.

Businesses operate in the same way, too. There’s always the possibility of losing a big client to unforeseeable circumstances like legal problems or going out of business. There’s also the chance of the economy slowing down. During such moments, bankruptcy may become an option to save you.

Thanks to bankruptcy laws, people can dare dream and attempt their ambitious plans to open successful businesses. Should their plans fall through, they can seek bankruptcy protection and get a fresh start.

Seeking Professional Help

When someone files for bankruptcy, they seek protection under bankruptcy laws to have their debts discharged and are relieved of the debt they have no way of paying back.

Choosing which is the best option for your situation is where professional help can come into play. You want to find someone who is not trying to sell you a service but looking out for the best route to take for your situation. A professional may advise you not to declare bankruptcy but to go with an alternative.

Bankruptcy Alternatives

If you don’t qualify for bankruptcy, or if you want to consider an alternative there are options available to you.

  • Implement anti-harassment laws which protect debtors from aggressive debt collectors. Some restricted actions include arresting you, calling whenever, threatening violence, and coming to your workplace.
  • Stretch your budget by cutting out excessive and unnecessary expenses.
  • Negotiate better repayment terms from your lenders. This process entails looking for a consolidation loan offering an easier repayment plan.
  • Increase your income.
  • Consider debt management by exploring non-profit credit counseling agencies. Some of the benefits include waived fees, lower interest rates, and a workable budget plan as you move forward.

Types of bankruptcies

  • Chapter  7 — Used when you are prepared to liquidate all your assets.
  • Chapter 11 — Used for reorganization.
  • Chapter 12 — Used for family farms.
  • Chapter 13 — Used when you want to have a repayment plan in place.
  • Chapter 15 — Used for foreign cases.

Note: Chapter 7 and Chapter 13 are used the most in the United States

How to File for Bankruptcy

Filing for bankruptcy isn’t as simple as stating that you cannot pay your debts. You are required to follow several legal procedures and meet set criteria. This is where attorneys come in to advise you on the best way forward.

The first step on your journey before declaring bankruptcy is completing a credit counseling session. This is to obtain a certificate that you will file alongside the bankruptcy plea. Fortunately, you can easily find numerous government-approved credit counseling agencies by visiting or calling a federal bankruptcy court near you.

Since every case is different, the counselor will review your problem individually. They will then present the available solutions, like budget and debt management and other alternatives to bankruptcy.

When filing for bankruptcy, you’ll need to submit a bankruptcy petition and financial statements detailing your debts, income, and assets. This is followed up with a means test form to determine whether you qualify for Chapter 7 or 13 bankruptcy. If your income is low, you’ll qualify for Chapter 7; else, it’s Chapter 13. You must also pay a filing fee, which can be waived if you can present evidence that you can’t afford it.

Your case will be heard by a bankruptcy judge after the bankruptcy trustee has held a meeting of creditors with the people you owe. If you’re found guilty of hiding assets or fraud, you stand to face criminal charges.

Before your debts are discharged, you’ll have to take a debtor education course to understand budgeting and money management. Once complete, you’ll receive a certificate of participation.

Why Should You Consider Declaring Bankruptcy?

In most cases, people who declare bankruptcy have more debt than money. For instance, a millionaire can have assets worth $2 million yet have $6 million in debt.

Before shutting the door to declaring bankruptcy, ask yourself if there’s any way to settle the massive debt. Realistically consider if it’s possible to pay off the debt in less than five years. If not, then the best solution is filing. The point of filing for bankruptcy is to provide relief and a second chance to debtors rather than giving them a life sentence.

The alternative is to continue accumulating fines and harassment from your creditors without having any way out of massive debt. Unfortunately, this is not a solution but rather an additional stress factor, especially if the cause of debt was unforeseeable.

Bankruptcy is stressful and something no business wants to go through. Filing or not filing for bankruptcy will affect finances, your family’s livelihood, and your overall well-being. However, the pros outweigh the cons when there’s no way out!

There are more cases of individuals filing for bankruptcy than businesses. Most of these personal debts are related to mortgages, auto loans, student loans, and credit cards that a person has acquired and cannot pay.

The Pros of Filing for Bankruptcy

When properly advised, businesses can use Chapter 13 bankruptcy as a financial planning tool. However, this only applies if they have the money to pay creditors by restructuring the payment terms.

Below are five points outlining the benefits of declaring bankruptcy:

1. Instant relief from debt

Although restrictions apply to each case, successful cases can liquidate their assets and get a fresh start.

2. Relief from bill collectors

Many people get frustrated and overwhelmed with the never-ending bills and constant phone calls from creditors. However, your creditors won’t continue to seek payment from you after filing successfully, thanks to the “Automatic Stay.”

3. Emotional relief

Having a massive debt with no possible payment plan can cause emotional stress. Declaring bankruptcy, therefore, allows people to lower their stress levels so they can figure things out.

4. Fresh start

Although filing for bankruptcy will affect your credit score, the benefit is that you can work towards rebuilding it progressively.

5. When there’s no way out – There is

When you have no other option, the law gives you a way out by filing for bankruptcy. It’s how most economies work in the world.

If it wasn’t for bankruptcy, many people wouldn’t take the chance of starting a business.

Because bankruptcy laws exist, more businesses are created every year. Bankruptcy isn’t designed for someone who thinks that if I don’t make it, I’ll just declare bankruptcy, but think of it as a safety net if you’re about to fall from a high-rise building.

The Cons of Filing for Bankruptcy

Below are five points related to the cons of declaring bankruptcy:

1. Credit Report

It’s crucial to understand that although filing for bankruptcy will give you a chance to start afresh, your credit score will be negatively affected, consequently affecting your future ability to use money. While the process may take 4-6 months, bankruptcy will be stuck on your credit report for 7-10 years.

2. Affects credibility

As mentioned, bankruptcy affects your credibility. Even after getting a fresh start, you may have a challenging time getting any loan or mortgage approval. And if you’re lucky to get one, the interest rates will likely be steep.

3. Other debt

Despite getting debt relief, not all your debt is cleared. Student loans, alimony, back taxes, and government fines are some of the outstanding debts that you’ll still have to pay.

4. Losing non-exempt property

There’s always the possibility of losing your non-exempt property, including vehicles, houses, bonds, stocks, and cash.

5. Costly

Filing for bankruptcy can quickly become a costly legal process. You’ll need to pay the attorneys, credit counseling service providers, trustees, etc.


Below you’ll find a few resources to help you expand your knowledge of filing for bankruptcy.

Many of the resources lead to Google search results and nuts by design to ensure you get the most popular and latest information any time you use the resources. Feel free to return to this page anytime to use them


Books are an excellent source of information that allows you to understand many topics.

With non-fiction books, you don’t have to read the book from cover to cover, but you can jump to the chapter that interests you.

Why not take a few minutes to see the published books related to bankruptcy? Below are two links, a Google Book search result, and the other leads to books listed on Amazon.

View the most recent Google search results for books related to bankruptcy.

See the books related to the pros and cons of filing for bankruptcy available on Amazon.


From my point of view, reading stories in the news covered by the media related to bankruptcy is something worth taking a few minutes to investigate.

If the media covers a story, it has some merit. When using a site like Google News, you can get relevant results by typing in your keyword and getting a list of the most recent as well as archived news stories.

See Google’s News search results related to bankruptcy.

Videos on YouTube

Last but not least, YouTube is a valuable source of information, especially for visual learners. I would rather watch a video than read an article.

Consider the topics listed below or to the right of your screen, depending on your device. These videos usually help me expand my knowledge by introducing me to perspectives I hadn’t explored previously. As a result, you may want to be on the lookout for them.

See the most recent videos related to the pros and cons of filing for bankruptcy.