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Going through a tough financial situation? Filing for bankruptcy can impact your credit report and make you ineligible for loan opportunities that you may need to cover business or personal expenses. When I sat down to write this guide, I looked into almost every thing that I could find online regarding how to pay debt. I came across bankruptcy way too often. As somebody who has gone through paying high-interest debt and has acquired loans for personal and business purposes, I don’t think you should ever file for bankruptcy (and I have listed the reasons below).

Why you should never file for bankruptcy

Filing for bankruptcy could yield both positive and negative outcomes depending on your financial situation. You can file for bankruptcy under chapter 13, chapter 7, and chapter 11. The last one is for businesses. Usually, salaried employees would file under either chapter 13 or chapter 7.

Chapter 13 bankruptcy filing

If you file under this chapter, the court approves a plan for you that you have to adhere to until you clear all debt payments over 3 – 5 years. This type of bankruptcy stays on your credit report for 7 years. 

Chapter 7 bankruptcy filing 

You will file for bankruptcy under this chapter if your income is too low to pay any debts within a given time frame. The court may sell most of your assets to pay off the creditors. This type of bankruptcy filing stays on your report for 10 years. 

Advantages of filing for bankruptcy 

There are a few advantages of filing for bankruptcy:

  1. It gives you an automatic halt of all debt payments, which means no more calls from creditors or monthly notices. This does not suspend your debt but only holds it off until a court can make a decision. 
  2. It can lessen some debt through dischargeable debts that include personal loans, credit card debt, and utility bills. Dischargeable debts do not include student loans. If you file under chapter 7, you get to keep your assets. There are even exemptions that allow you to keep your wedding rings, cars, and other personal stuff. Different states have different exemptions. Talk to a lawyer in your home state to learn about the exception.
  3. Finally, bankruptcy allows you to start fresh; it gives you a chance to rebuild your credit score.

Disadvantages of filing bankruptcy 

While there are a few advantages, there are many disadvantages of filing bankruptcy (either chapter 13 or 7) that you need to consider:

  1. Immediate loss of credit cards 

Once you file for bankruptcy, you lose all credit cards. Your bank may try to sell you an unsecured credit card that may come with high interest. Even If you file for bankruptcy, do not fall for this trap. Instead, opt for borrowing money from friends and family. 

2. Your credit score gets slashed 

If you have a low to average credit score, the bankruptcy filing may lower it by 30 to 50 points. But if you have a high credit score, bankruptcy may cut it down by 100 – 150 points, which is a lot. Additionally, you can’t qualify for a loan or mortgage. 

3.Your chances of getting employed are lowered 

Some employers check employees’ financial background, which determines their eligibility for the job. And since the bankruptcy stays on your credit report for 7 to 10 years, it may impact your chances of securing a good job. 

4.Denial of tax refunds 

State, local, and federal tax refunds may be denied if you file for bankruptcy. You need to check with your local law services to understand how much tax refunds you’d be able to get in case of bankruptcy.

5. Loss of data privacy 

Your name and address appear in the public domain, which means that your name and address appear in court records for employers to access. This can allow other people to judge your ability to have financial stability and hence impact your future opportunities. 

6. Bankruptcy fees 

Bankruptcy does not come free of cost. For chapter 13 filing, expect to pay anywhere between $300 to $310 in addition to lawyer fees that could be around $1,500 – 6,000. For chapter 7 expect to pay around $335 in addition to the attorney’s fee which can be around $800 – $3,500. Different states have different filing fees.

7. Bankruptcy conditions 

Filing for bankruptcy comes with several conditions that define whether you can apply for it. These conditions include:

  1. You should not have used a credit card under a different social security number. 
  2. You should not have overspent on exaggerated and extravagant gifts for friends. 
  3. You should not have been tied to fraudulent activity in the past. 
  4. You should not have transferred the property to a relative before filing for bankruptcy. 
  5. You should not have received a substantial amount of inheritance before filing for bankruptcy.   

Remember that bankruptcy does not eliminate the nondischargeable debt that includes student loans, criminal fines, and child support. 

Here’s why I don’t recommend that you file for bankruptcy 

First, you are depriving yourself of mortgages and loans that you could use to start a business and get yourself out of the financial rut. You are putting your credit score on the line, and it can make you ineligible for many opportunities, including great jobs. 

Second, You are risking your assets. It’s not in your hands to choose under which chapter you will file for bankruptcy; it depends on your financial situation. If you cannot pay your debts in any way, you will have to file under chapter 7, under which you can lose assets. If you file for chapter 13, you may not lose assets but still, get your credit score slashed and lose several opportunities. 

So, how to pay debt if you don’t file for bankruptcy?

Several effective ways can not only help you pay off all of your debt, no matter how big it is, but also ensure that you never have to be in debt again. Bankruptcy is the lazy way to do things. While it may help you discharge a lot of debt, it won’t help you in the long run. Don’t take the easy way out, instead try these proven methods to eliminate debt. 


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