Key Disadvantages of Bankruptcy

June 30, 2009 by  Filed under: Bankruptcy 

Without fully understanding the disadvantages of bankruptcy, a lot of people will file for the “protections” it offers. In most cases, filers believe that bankruptcy clears the slate. Without a complete knowledge of bankruptcy provisions, a lot of borrowers actually find themselves in a deeper financial rut than before they filed. After all, as a last resort, bankruptcy was created to penalize everyone involved, including you. With that in mind, you should have a thorough understanding of the disadvantages of bankruptcy before you file.

As a leading disadvantage of bankruptcy, the fact that a discharge will not always clear all debt is one that is often overlooked by borrowers. That’s right; in some cases, even after a trustee has liquidated your assets and repaid creditors, you could still owe others whose debt was exempt from the bankruptcy discharge.

Another disadvantage of bankruptcy is that you not only lose your existing property, including (in some cases) real estate, automobiles, investments and other personal belongs, but your rights to future property. In most cases, “future property” can include winfalls such as an inheritance.

Where Chapter 7 is considered, you will need to be committed to your decision for at least seven years. This is because a bankruptcy discharge is irreversible, meaning you cannot repay any unpaid debt after the bankruptcy has been discharged. As a result, your credit score will suffer and most lenders will not entertain granting you additional credit, even if you have the means of repaying that credit several times over.

Chapter 7 bankruptcy can be filed for almost any amount of debt. The one restriction is that debtors cannot file another petition within six years of their last bankruptcy discharge.

Another often-overlooked disadvantage is that bankruptcy will take a mental and physical toll on filers. Since a discharged bankruptcy creeps up regularly over time, a discharge can actually have traumatic effects on filers.

In many cases, the stress from bankruptcy will result in relationship problems, including martial breakdown and divorce. Ultimately, this worsens the financial impact of bankruptcy, leaving bankrupt individuals feeling even more beaten down and defeated. Such relationship stress can also lead to problems within shared social circles and, not surprisingly, bankruptcy also increases the probability of substance abuse. In fact, the feelings of “loss” are greatly enhanced among bankrupt individuals.

Such feelings of loss, defeat and trauma often make managing regular relationships with other family and friends difficult. The difference in opinion among friends and family, combined with the feelings of guild and shame, often alienate bankrupt individuals from those who have been closest to them.

Despite the disadvantages of bankruptcy, some advantages exit for borrowers who are overwhelmed by tremendous debt loads. One of the biggest advantages is that borrowers who are looking to file for bankruptcy must enroll in a credit counseling program. This program can teach many borrowers how to manage their finances and, in some extreme cases, can help borrowers avoid bankruptcy altogether. However, when there are no other options available, borrowers should consider bankruptcy… as a last resort. 

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