Financial planners have a big hate going for bankruptcy. They almost universally nay-say it and point to the many alternatives. CPAs and attorneys, on the other hand, often speak of the advantages to filing bankruptcy and are quick to point out the “fresh start” aspect of the move. But it’s a fact that too many consumers view bankruptcy as a magic pill that will solve all their financial, and life, problems. That attitude is so far from reality that it’s almost an urban legend. What’s the truth? For an overview of both the good and bad sides of filing bankruptcy:
Sometimes Bankruptcy Makes Sense
If most of your debt is unsecured, credit-card type obligations, and you have absolutely no way of paying it off in the foreseeable future, then bankruptcy might be an appropriate option. However, this would assume that you have already investigated debt resolution programs with your creditors and failed to come to a workable solution. It also assumes that you are ready to live for a decade with a bankruptcy on your credit file.
Filing Bankruptcy is Usually Not a Wise Solution
Some types of debt are not discharged in bankruptcy, so filing might not get you any relief. Only some kinds of taxes and student loans can be discharged, but most credit card and other unsecured debts can be eliminated. In many cases, you can work directly with credit card companies to close your accounts and set up payment plans. Card companies lose out big if you file, so they’re usually glad to make payment arrangements with debtors. And if most of your debt is taxes or student loans, bankruptcy won’t do you much good anyway.
You’ll need about $1,500 just to file, and if a major financial catastrophe comes along a few years from now, you won’t be able to file again. It only makes sense to file when there is no alternative. If you have any luxury items, like boats or expensive jewelry, the bankruptcy court will seize them and sell them to recoup some of the costs and possibly pay off any secured creditors. You will lose complete use of any credit cards you had. Your full name will be reported on a national bankruptcy database for all the world to see. The bottom line is this: unless you really, really need to file bankruptcy, don’t. The alternatives are likely much better, and much less painful, both financially and emotionally.
Think Long and Hard Before Filing Bankruptcy
Always investigate every option besides bankruptcy. If you are not well-versed in financial matters, consider consulting with a no-cost credit counselor or a low-fee attorney. Expert advice is a smart way to begin your decision process about filing. Bankruptcy is a life-changing decision and is not to be taken lightly. What many people don’t know is that it cost money to file bankruptcy. Fees vary widely from state to state, but $1,500 is a typical charge for a Chapter 7 filing. Chapter 13 (not a full discharge of debt, but a repayment plan approved by the court) cost more because there’s more paperwork and court time involved.