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The Pros and Cons of Filing for Bankruptcy: Is It Right for You?

For many people, there are few things more stressful than worrying about money. While most people may feel some financial tension at some point in their life, for some, this tension can be omnipresent. Being worried about being able to pay your bills, make your mortgage or rent payments on time, or feed your family can be a terrible feeling, especially if it’s gotten to the point where creditors are constantly calling or threatening legal action. 

If you have found yourself in a place of financial despair, it’s important that you understand your full range of legal options. While it’s often considered a last resort, filing for bankruptcy could help. Here’s an overview of what you should know about the pros and cons of filing for bankruptcy, how to determine whether bankruptcy is right for you, and how you can learn more about the bankruptcy process.

What Is Bankruptcy?

Bankruptcy is a legal, court-facilitated process through which a person seeks relief or partial relief from their debts. There are multiple different types of bankruptcy and the type of bankruptcy that an individual files will be dictated in part by the amount of income and assets they have. If a person has enough income, they may enter into a repayment plan through a Chapter 13 bankruptcy; otherwise, they may qualify for a Chapter 7 bankruptcy. 

Pros of Filing for Bankruptcy

Filing for bankruptcy can have many benefits if you are a person who has exhausted all of your other debt-relief options. Some of the main advantages of filing for bankruptcy include:

  • A fresh financial start. As explained by the American Bar Association, perhaps the most important advantage of filing for bankruptcy is that filing for bankruptcy provides a debtor with a fresh financial start. This allows an individual with freedom and peace of mind to move forward with their life with a clean financial slate. This can be a very important time of financial recovery and restarting. 
  • The automatic stay. One of the biggest benefits of filing for bankruptcy is that upon filing, the automatic stay will go into effect. The automatic stay is an immediate pause on all debt collectors’ ability to collect on a debt. Once the bankruptcy process is initiated, a debt collector is legally barred from contacting you to collect on debt while the proceeding is ongoing
  • Ability to keep many assets in some cases. Depending on the type of bankruptcy for which you file and your individual financial situation, filing for bankruptcy may actually allow you to keep many of your assets, especially if you file for a Chapter 13 bankruptcy.
  • Sense of closure and relief. Financial insolvency can be overwhelming. When you file for bankruptcy, there can be a sense of relief and closure that comes with it. This can be good not only for your finances but also for your mental health. 

Cons of Filing for Bankruptcy

While there are many advantages of filing for bankruptcy, the process isn’t without some risks and downsides. These include:

  • Hit to your credit. Chances are that if you are filing for bankruptcy, your credit score is already fairly low. That being said, if you file for bankruptcy, your credit score will drop even lower—and the bankruptcy will stay on your credit report for between 7-10 years. 
  • Challenges securing housing, financing, or certain jobs. Having bankruptcy on your credit report can make it hard for you to take out a new line of credit, get a loan, get approved for a mortgage or a housing rental application, or even get a job in some cases (depending on the industry in which you work). 
  • Loss of some assets. If you file for a Chapter 7 bankruptcy, your non-exempt assets will be subject to seizure and will be liquidated in order to pay back your creditors to the extent possible. This might mean that you could lose a home, car, or another valuable asset by filing. 

Is Bankruptcy Right for You?

Whether or not filing for bankruptcy is the right decision for you really depends on your situation. If you have exhausted other debt-relief options, such as debt consolidation, creditor negotiation, refinancing, asking friends and family for help, and more, then bankruptcy may be the best option. However, you should always consult with a financial or legal professional before filing for bankruptcy to make sure you understand the pros and cons that filing for bankruptcy brings to your life.