By: Albert Gutierrez
Filing for bankruptcy can be beneficial for many debtors who do not have the ability to pay off their debts and struggle to keep up with their financial obligations.[1] Some advantages of filing for bankruptcy include the automatic stoppage of debt collection activities, the cancellation of some acquired debts, the ability to exempt certain property and possessions, and a clean slate to plan a new financial approach.[2] Bankruptcy can be a step in the right direction from relieving overwhelming debt and resolving issues that once seemed unattainable to achieve.[3] A court will grant a discharge which will release the debtor from personal liability for certain types of debts.[4] This absolves the debtor from the obligation to repay their debts and creditors cannot contact or pursue debtors for outstanding debt.[5]
While this seems very resourceful, there are drawbacks to obtaining such a discharge. Eight percent of people who obtain a discharge for a first bankruptcy, unfortunately, file for a second petition to relieve further or new debt. The truth behind bankruptcy is that while bankruptcy does relieve debt obligations, bankruptcy discharges are problematic for many debtors that do attain such a benefit because of the rise of new issues that come with receiving a discharge.
Under federal law, you cannot be discriminated against and protects employees from discrimination in situations where an employee terminates an employee, hires an employee, denying or revoking a franchise license, or obtaining a grant.[6] While this is beneficial, new issues arise at the end of a first bankruptcy that do carry over to a debtor’s life.
Receiving a bankruptcy discharge does not resolve all your issues, but rather can bring rise to new issues if old habits are not resolved. Bankruptcy is usually brought on by borrowing more money than can realistically be repaid, buying more than what your income can support, and/or not being responsible with your bills.[7]
Moreover, filing for bankruptcy does have harmful effects for individuals. Filing for bankruptcy remains on your credit bureau report for six years and a second bankruptcy will remain on your credit for 14 years and becomes public record, which remains a part of your permanent database.[8] Such an impact will make it more difficult to borrow money and interest rates for loans will be a lot higher.[9] The reason for this is that creditors are reluctant and will look to see if you are willing and able to repay such a loan.[10] Starting a business, buying a home, or even planning a vacation is a treacherous and dangerous feat.
This leaves the question of what debtors can do to resolve their issues. For starters, debtors should create a budget, set aside money for emergencies, account for future income, and remove non-financial issues that have played a large role in the demise of this situation. [11]Creating these healthy habits can avoid a difficult situation.
Debtors should also look into alternatives to bankruptcy that may include debt consolidation loans, debt repayment programs, debt settlements, consumer proposals, and communicating with creditors about the situation at hand.[12] Creditors may be receptive to lump sum payments to avoid a bankruptcy case because it protects debtors from further personal liability on unsecured debts.[13]
Creditors too may want to avoid a bankruptcy filing. Bankruptcy can be very expensive, burdensome to all parties involved and may not solve the issues at hand. Creditors will be receptive to negotiating or refinancing the existing debt because it becomes less likely that their debts will be discharged at the end of the bankruptcy case and are more likely to receive their unpaid debts. Bankruptcy is a great tool, but debtors should find ways to avoid said use because of the lasting issues that may arise with obtaining such a benefit.
[1] Dmoakler, What Are the Advantages of Filing Bankruptcy, CareConnectUSA (Nov. 30, 2020), https://careconnectusa.org/blog/what-are-the-advantages-of-filing-bankruptcy/#:~:text=%205%20Advantages%20of%20Filing%20Bankruptcy%20%201,you%20to%20keep%20certain%20property%20and…%20More%20?msclkid=a6676cbec28111ec813544f00c0d24b0.
[2] Id.
[3] Id.
[4] The Peck Law Group, Discharge and Dischargeability of Debt in Bankruptcy, PLG:Peck Law Group, https://premierlegal.org/discharge-and-dischargeability-of-debt-in-bankruptcy/#:~:text=In%20both%20Chapter%207%20%28liquidation%29%20and%20Chapter%2013,states%20Los%20angeles%20Bankruptcy%20Attorney%20Steven%20C.%20Peck.?msclkid=3de45df1c61611ecb31ac2e615981b25 (last visited Apr. 27, 2022).
[5] Id.
[6] Bankruptcy Debtors Cannot Be Discriminated Against, Phillip and Thomas LLC: Attorneys at Law (Sep. 22, 2014), https://phillipsandthomas.com/2014/09/22/bankruptcy-debtors-cant-be-discriminated-against/?msclkid=946db041c62f11eca89c71b0ca337c12.
[7] Kira Botkin, When and Reasons Why To File For Bankruptcy, Borrow Money (Sep. 14, 2021), https://www.moneycrashers.com/when-reasons-why-file-bankruptcy/?msclkid=3dc096b0c63011ec8ea273dc55cbe0f3.
[8] Ellen Chang, How Long Does A Bankruptcy Stay on Your Credit Report, experian: bankruptcy (April 12, 2018), https://www.experian.com/blogs/ask-experian/how-long-does-a-bankruptcy-stay-on-your-credit-report/?msclkid=ac91001fc63011ecaf60ff3ea0fea7d1,
[9] Id.
[10] Id.
[11] Bankruptcy Alternatives: Understand Your Options Before You Get Locked In, Debt.com., https://www.debt.com/bankruptcy/alternatives/#:~:text=%20Bankruptcy%20Alternatives%20%201%20Consolidation%20loans.%20A,to%20start%20any%20search%20for%20debt…%20More%20?msclkid=c4d66b33c63111ecaf65d954f3a2a419 (last visited Apr. 27, 2022).
[12] Id.
[13] Id.