Examining the Drawbacks of Bankruptcy

In the past, consumers with too much unsecured loan debt – usually credit card debt – relied on bankruptcy to shed this indebtedness virtually overnight. The federal bankruptcy court would liquidate all of their assets, which were usually quite negligible, and also absolve their outstanding loan balances. At the end of the process, the debtor was without credit card debt, but in some cases also without a car or home, and always without credit cards that could be used for emergency purposes.

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Although it is tempting to look for bankruptcy protection when the calls from creditors are becoming worrisome and the late notices are piling up, there are some distinct drawbacks to filing for bankruptcy. First and foremost, there is still a social stigma attached to bankruptcy, and this may actually bleed through to the workplace, where debtors who relied on bankruptcy protection may be denied employment because of the negative notation in their credit profile.

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This negative credit file notation also has the power to prevent the debtor from obtaining another loan, getting a credit card, or even obtaining a mortgage. For about 10 years, the credit rating is damaged and there is no amount of credit repair that can erase this blemish on the credit file. Once the bankruptcy discharge is a few years old, the debtor may once again be offered credit, but it will be at much higher interest rates. The most common form of bankruptcy filing used to be Chapter 7, which temporarily halted foreclosures but made cosigners liable for debts. It is available once every six years to a consumer.

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It is noteworthy that while bankruptcy will wipe out a good many unsecured debts, there are some which survive bankruptcy and will continue to haunt the debtor. These include judgments, student loans, income taxes, alimony and child support, and any debts that are considered to have been incurred via fraud. Sometimes the lure of getting rid of credit card debt is so strong that consumers forget to actually total up the amount of debt they are still left with in the end.

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Family owned businesses also take a significant hit when bankruptcy is filed. The odds are good that the business will no longer receive the loans needed in the future to remain viable, and while the short term elimination of outstanding debts may be attractive, the long term damage may actually undo any benefits of bankruptcy protection. Since the recent change in bankruptcy legislation, Chapter 13 filings are more plentiful, and they essentially require the repayment of debts over the course of three to five years.

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Fortunately there are several other options that could make bankruptcy filings unnecessary and could actually eliminate the need for spending long years repaying the debt. Some actually mimic the Chapter 13 filing option, but do not leave a 10 year blemish on the consumer’s credit profile. Debtors need to educate themselves and also seek advice from reputable credit counseling agencies that can help them to understand the advantages and disadvantages of a bankruptcy filing, while also exploring other options.

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