Filing for bankruptcy is an important decision that is usually made under stressful circumstances. If you are overwhelmed by your debt, default is a legal process that could relieve you of your financial burdens. In the short term, filing for bankruptcy could stop a foreclosure or car repossession, protect your wages from garnishment, or keep your utilities from being turned off.
When large debts get out of control, it’s normal to panic and search for a way out. Make sure you aren’t thinking of bankruptcy as a magic pill or an easy way out. It’s a serious decision that comes with many disadvantages and long-term consequences that can outweigh the short-term benefits.
Whenever possible, we recommend setting aside emotions to think critically about the pros and cons of bankruptcy. Here we unpack six reasons not to file for bankruptcy to help you make a fully informed decision.
8 Reasons Not to File For Bankruptcy
- You Can Afford Your Debt
If you can afford to make payments on your debt, bankruptcy wasn’t designed for you. Bankruptcy is usually a last resort for people who are in arrears and whose debt is past a point of no return. In fact, to qualify for bankruptcy, you have to submit to a means test to prove that there is no reasonable way for you to pay back the debt. Often this involves a minimum of 90 days of non-payment before filing to increase your chances of success. It can also mean proving to the court that you don’t have any assets that could be used to pay back the debt.
- Your Debt Is Mostly Tax or Student Loan Debt
In a bankruptcy case, not all debts are treated equally. Taxes and student loans are non-dischargeable, with very narrow exceptions. Income taxes can only be discharged in bankruptcy if you file Chapter 7, and they meet strict criteria.
For example, in order for income taxes to be discharged, the debt must be three years old, and you must prove that you did not commit willful tax fraud or evasion, which includes having filed a correct tax return at least two years before filing for bankruptcy, among other things.
Student loan debt became ineligible for bankruptcy in 2005 when the tax code was amended. Student loan debt can only be discharged in cases of extreme hardship, typically where dependents are involved.
- 7 to 10 Years Credit Report Damage
Bankruptcy is one of the worst things you can do to your credit.
A Chapter 13 bankruptcy will show on your credit report for up to seven years, while a Chapter 7 bankruptcy will be visible for ten years. It’s a big red flag for lenders because a bankruptcy tells a lender that you failed to pay a debt. This can make it challenging to buy a home or car, and in some instances, can make it hard for you to rent an apartment or get a job.
- Legal Fees and Attorneys are Expensive
If you are considering bankruptcy, then it’s safe to say money is tight for you, and any fees associated with bankruptcy will be a cause for concern. In addition to filing fees, hiring a bankruptcy attorney costs thousands of dollars that you’ll need to be able to pay upfront. Filing pro se (without a lawyer) is an option, but it’s a risky one. The success rate for pro se bankruptcy filers is much lower. For example, 2014 court data from the Los Angeles area show that pro se Chapter 7 cases were twice as likely to be dismissed as attorney represented ones.
- You Plan to Change Jobs In The Next 7 to 10 Years
You can’t be fired for filing bankruptcy, but you may well get passed over for new opportunities if a prospective employer spots a bankruptcy on your credit history.
Not all employers are interested in checking a prospective hire’s credit report, but you do give them the right to look the information up when you agree to a background check. Positions that involve handling money or in industries that are money-focused (finance, banking, insurance) may have an interest in how you manage your money.
The logic: how you handle your finances reflects how you would manage someone else’s.
- Bankruptcy Can Affect Your Mental and Physical Health
Many people experience anxiety, stress and depression in the wake of a bankruptcy case. Filing for bankruptcy carries a social stigma that can cause shame and embarrassment for the filer. In the United States, people who struggle with debt are more than twice as likely to suffer from a mental illness.
A recent study also showed that poor health is an unintended consequence of filing for bankruptcy in women with a history of depressive symptoms.
- Bankruptcy Cases are a Matter of Public Record
Because bankruptcy is a form of debt relief granted by the government, they are considered a matter of public record and are viewable to anyone who goes through the steps required to look up the information. Though the practice is becoming less common, some towns and municipalities still print bankruptcies among public notices in the local newspaper.
- You Haven’t Tried Negotiating a Settlement
If you haven’t looked into a debt settlement option, consider contacting a debt specialist to see if debt settlement is an option for you and your debt. Most debt settlement programs can help you pay off your debt in 12 to 48 months for less than you owe without the lingering mark of bankruptcy on your credit report. If you haven’t considered debt settlement or other bankruptcy alternatives, you should rule them out before making a decision.
Bankruptcy Isn’t For Everyone
Bankruptcy isn’t like a “get out of debt free” card, so if you can afford to manage your debt in any other way, you should always consider that first. Bankruptcy has serious consequences for your credit and long-term financial health. Debt consolidation, and more specifically, debt settlement, may be the right option for you if you have the means to pay your debt but are not happy with your current repayment plan.
The information provided in this article is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. You should consult an attorney for legal advice concerning any particular legal matter.