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Consumer Bankruptcy
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Disadvantages of Filing Personal Bankruptcy

There are two sides to the coin when filing bankruptcy. Bankruptcy’s disadvantages must be considered to determine whether filing is prudent.

The following are disadvantages to filing bankruptcy:

  1. Impaired credit (report and score) and loss of credit
  2. Court costs and attorneys’ fees and costs
  3. Loss of property and nonessential possessions
  4. Ripple effect
  5. Not all debts discharged

Learn more about some of the pros and cons to filing and some of the advantages to filing for personal bankruptcy.

Impaired credit and loss of credit

The major disadvantage of filing bankruptcy is its effect on a debtor’s credit rating. Bankruptcy can remain on a credit report for 10 years. In some cases, a debtor is allowed to obtain credit but at a very high interest rate. For a period, a debtor is deprived of access to loans and credit cards. He or she is also unable to obtain a mortgage for some time. Bankruptcy is likely to impair a debtor’s credit for at least seven to 10 years.

Court costs and attorneys’ fees and costs

There is a cost for filing bankruptcy in filing fees and attorneys’ fees and costs. A standard Chapter 7 costs $1,000 to $2,000 in attorneys’ fees in some jurisdictions.

Loss of property and nonessential possessions

One of the most painful disadvantages is the loss of property that cannot be exempted. In many states, exemptions for a debtor’s property are governed by state laws and those laws protect only essential possessions.

Ripple effect

A bankruptcy has consequences for the party filing and the parties who are directly or indirectly affected by the bankruptcy. A bankruptcy has a ripple effect that radiates beyond the debtor. An individual’s bankruptcy can affect a family business even if that business is conducted as a corporation. Loans to most businesses are often cosigned by owners, so the bankruptcy of an owner and destruction of that individual’s credit rating may harm the business’s access to loans or financing. Cash shortages may result, which jeopardizes the fiscal health of the business. The result may be the bankruptcy of the business with a financial loss to the family, employees, suppliers, and creditors.

Not all debts discharged

It is an incorrect assumption that bankruptcy wipes the slate clean of all debts. Bankruptcy removes many debts through a discharge; however, that discharge has limits. Debts associated with drunk driving judgments, fraud, past-due child support, alimony, divorce settlements, income taxes, and government student loans are expressly carved out of a discharge. Once a debtor is discharged, he or she will not be able to obtain another discharge for six years and any new debts incurred after filing bankruptcy are exempted from discharge.

Filing bankruptcy is not without disadvantages, each of which must be considered before filing with the guidance of counsel and/or a financial advisor.