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.
Perhaps the greatest disadvantage of bankruptcy is it will not necessarily “clean your slate” of debt. In some cases, you can still find yourself owing money even after all of your assets have been liquidated and the funds paid to creditors. This means you are still prone to receiving collection calls.
Another big disadvantage of bankruptcy is that you lose property. This could include, but is not limited to, real estate, automobiles, investments, and other personal belongings. In most cases, property also includes your rights to future inheritances.
When deciding to file for bankruptcy, particularly Chapter 7, you need to be 100% certain of your decision as you cannot withdraw from your commitment. This means that once a discharge has been granted, you cannot avoid or repay the debt, resulting in damaged credit for the next seven years. With a damaged credit rating, most lenders will not consider any credit applications you make, even if you have the means to repay such credit several times over.
You can file bankruptcy for any amount of debt. The minimum period between two chapter 7 bankruptcies is six years.
Many filers often overlook the fact that the process of filing for bankruptcy will take a psychological and physical toll. For most people, filing for bankruptcy takes a tremendous toll as the bankruptcy seems to constantly follow them.
For many, the stress of bankruptcy leads to marital problems, including divorce. In some cases, this can deepen the financial strain of a discharged bankrupt, leaving them feeling even more defeated or beaten. Remember, six years must pass before the next bankruptcy filing. Relationship stress can cause problems with social circles and not surprisingly, bankruptcy also increases the likelihood of alcohol abuse. The feelings of loss are rather strong in those who have gone bankrupt.
Due to the mental trauma, it can become extremely difficult for you to manage normal family and social life. There can be serious differences between spouses. The persons will also find it difficult to get along with friends because of feelings of shame and guilt.
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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Written: Jun 30, 2009Tags: Finance