April 23, 2024
Is Filing Bankruptcy Bad?

by Denis Kleinfeld

Filing for bankruptcy is a big step that can help if you are deep in debt. Yet, knowing the good and bad side is essential before deciding. This piece will show you the ups and downs of bankruptcy. It will also clear up wrong ideas and walk you through the process. So, you can decide what’s best for you wisely.

Key Takeaways:

  • Bankruptcy can provide relief from overwhelming debt
  • Filing for bankruptcy has consequences that need to be considered
  • Understanding the bankruptcy process is crucial before making a decision
  • There are various types of bankruptcy, each with its own requirements and implications
  • Rebuilding credit after bankruptcy is an important step for financial recovery

How Does Bankruptcy Work?

Bankruptcy is a legal process that helps people deal with their debt. It offers relief from debt collection efforts and a chance to start fresh. Understanding the bankruptcy process and your options is key to getting through it.

There are two main types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 involves the sale of non-exempt assets to repay debts. Chapter 13 creates a plan for you to pay back your debts over three to five years.

When thinking about bankruptcy, it’s smart to get help from a bankruptcy lawyer. They can look at your financial situation and outline your bankruptcy process. A good lawyer will make sure you use the right bankruptcy type.

One big plus of bankruptcy is getting rid of some debts. But not all debts can go away, like taxes, student loans, and child support. If bankruptcy is a choice for you, it can give you a new financial beginning.

Type of Bankruptcy Description
Chapter 7 Chapter 7 means selling off some assets to pay debts.
Chapter 13 This is Chapter 13, where you pay back debts over a few years.

If you’re thinking about bankruptcy, take it seriously. It can change how easily you can get loans and more. But for those really struggling with debt and money problems, it could be a way out.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, known as liquidation bankruptcy, involves selling off not-needed assets to pay creditors. Some assets, like necessary household items, can be kept. To file for Chapter 7, you must pass a means test and follow income rules. A trustee helps by selling assets and paying creditors. This type mainly clears unsecured debts.

In Chapter 7, not-needed assets of the filer are sold to pay off debts. These can be things like homes, investments, or pricey personal items. But, the filer can save some things, like basic home items, a bit of home value, and certain retirements. Each state has different rules for what’s okay to keep. So, it’s wise to talk to a knowledgeable lawyer first.

Before you can file, you must pass a means test to see if you qualify. This test looks at your income, what you spend, and how many are in your home. If your income is lower than the state’s average or you don’t have much left after bills, you can choose Chapter 7. If you make more than the state average, you may have to look at Chapter 13 instead.

Once you start Chapter 7, a trustee will be assigned to watch over your case. They make sure your stuff is sold fairly, and creditors get paid. They also run a 341 meeting, where creditors can ask about your finances.

Chapter 7 mainly helps with debts where nothing is put up for guarantee, like credit or medical debt. You might not have to pay these back. But, debts like school loans, kids’ support, and tax bills usually won’t go away in Chapter 7.

Filing Chapter 7 could give you a new start by wiping out most debts. Yet, it’s vital to work with an experienced lawyer for the best advice for your case.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a way for individuals to deal with their debts. It lets them make a plan to pay off some or all of what they owe in three to five years. This is different from Chapter 7, where assets could be sold to pay back creditors. In Chapter 13, a payment plan is set up instead.

This plan is made to fit the person’s financial situation. It considers their income, what they spend, and the types of debts they have. It has to be okayed by creditors to make sure it’s workable for them too.

One key benefit of Chapter 13 is keeping your stuff while you pay back what you owe. This is great for anyone with things they really value or can’t afford to lose.

“Chapter 13 bankruptcy allows individuals to reorganize their debt and work towards a more manageable financial future.”

A special trustee keeps an eye on the Chapter 13 process. They make sure everyone follows the plan. This person is in charge of taking payments and giving the money to the people you owe, as agreed.

Sometimes, you can talk to your creditors and change the debt’s terms. This might mean lower interest rates or more time to pay. Such talks can make the plan easier to stick to.

By filing for Chapter 13, people get a real chance to sort out their money problems. If they keep to the plan and pay what they need to, they can set the stage for a fresh financial start.

Chapter 13 Bankruptcy Overview

Advantages Disadvantages
Allows for the retention of assets Requires a repayment plan over several years
Debt negotiation is possible Might negatively impact credit in the short term
Provides a structured approach to debt repayment Requires strict adherence to the repayment plan
Offers relief from collection efforts May involve higher overall repayment amounts compared to Chapter 7 bankruptcy

Chapter 13 Bankruptcy

Key Terms in Bankruptcy

Knowing the main bankruptcy terms is key to understanding the process. Learning what these words mean will help you make better choices and navigate the process well.

341 Meeting

This meeting is very important in bankruptcy. The filer gets asked about their money situation by the trustee and any attending creditors. It helps everyone involved understand the situation better.

Credit Counseling

Meeting with a credit counselor is needed before bankruptcy. They review your finances and give tips on budgeting and handling money. They also help you find ways to avoid bankruptcy.


Getting the discharge is a big step in bankruptcy. It means the end of the case and you don’t have to pay most debts. After this, creditors can’t keep asking you for money.

Exempt Property

Exempt property is what you can keep during bankruptcy. It’s usually things you need for everyday life. What you can keep depends on the laws where you live.


A lien lets a creditor sell your property to pay your debt. It’s like a promise to the creditor that they can get their money back by selling your things if you don’t pay them.


This is the sale of certain assets to pay back debts. In Chapter 7 bankruptcy, selling assets is a big part of the plan. The goal is to help you get a fresh start financially.

Means Test

The means test checks if you’re fit for Chapter 7 bankruptcy. It looks at your finances to see if you can pay your debts. If you don’t pass, you might be able to file under Chapter 13.

Reaffirmation Agreement

You might agree to still pay a debt after bankruptcy. This is a reaffirmation agreement. It lets you keep what you bought with the loan, like a car, while still paying off the debt.

Secured Debt

Secured debt is backed by something you own. Until you pay it off, the creditor has a right to that item. A house or a car loan are examples.


The trustee is in charge of your bankruptcy case. They make sure laws are followed, check your finances, and handle your payment plan or asset sale.

Unsecured Debt

Unsecured debt is not connected to anything you own. Credit cards and personal loans are common unsecured debts. In bankruptcy, these debts are often forgiven, ending your obligation to pay them back.

Debt That Can’t Be Forgiven in Bankruptcy

Bankruptcy can help deal with a lot of debt, but some debts won’t go away. These are the debts that must still be paid. So, it’s key to know what you’ll still owe even after bankruptcy.

Types of Non-Dischargeable Debts

Here’s a list of debts that don’t go away in bankruptcy:

  • Alimony and Child Support: You can’t clear debts like spousal or child support through bankruptcy. These must be paid as they are legally required.
  • Tax Liens: Federal taxes and penalties often cannot be forgiven in bankruptcy. Seeking advice from a tax professional is crucial in this situation.
  • Fines and Penalties: Debts like traffic tickets or restitution fees are usually not forgiven in bankruptcy. They have to be fully paid.
  • Personal Injury Debt: Payments arising from injuries when intoxicated are not forgiven. Nor is debt from intentionally harming someone.
  • Student Loans: Student loans are mainly hard to get rid of in bankruptcy. Yet, there are steps you can take, like an adversary proceeding, to try to clear them.

There are other kinds of non-dischargeable debts as well. Like those to special retirement plans or certain housing fees. For your exact debt situation, a talk with a bankruptcy attorney is always a good idea.

Non-Dischargeable Debt Description
Alimony and Child Support Court-ordered spousal support and child support payments
Tax Liens Federal tax liens, including income taxes and tax penalties
Fines and Penalties Government fines and penalties, such as traffic tickets or criminal restitution fees
Personal Injury Debt Debt resulting from personal injury caused while intoxicated or willful and malicious injuries
Student Loans Debt incurred for educational purposes, historically difficult to discharge

Although some debts won’t disappear, bankruptcy can still help. It can wipe out or reduce other debts, giving you a chance for a financial fresh start.

Consequences of Bankruptcy

Filing for bankruptcy needs deep thought. It can help with huge debts, but brings other problems. These issues can affect your money life.

Potential Loss of Property in Chapter 7 Bankruptcy

In Chapter 7, you might lose things that aren’t necessary to pay off debts. The law allows some items to be safe, depending on your state rules. Talking to a bankruptcy lawyer is smart. They can help keep your important stuff safe.

Damage to Credit Scores

Bankruptcy hurts your credit scores badly. It stays on your credit report for years. This makes it harder to get loans later. Working to build your credit up again is very important after bankruptcy.

Impact on Others, Including Co-signers or Individuals with Shared Debts

Filing impacts anyone you share debts with. This includes loans with family or friends. They might have to pay the whole debt after your bankruptcy. It’s key to talk openly with them about your financial issues.

Remaining Debt After Bankruptcy

Not all debts go away with bankruptcy. Loans for school, child support, and some taxes stay. Knowing which debts stay is vital for your plan.

Getting advice from a bankruptcy attorney or financial advisor is smart. They can give advice that fits your situation. This will help you see if the benefits outweigh the risks.

Bankruptcy is serious and should be thought through carefully. It affects your property, credit, others you owe with, and debts that remain. Understanding these effects helps make a wise choice about your future.

loss of property - consequences of bankruptcy

Pros and Cons of Bankruptcy

Thinking about bankruptcy for tackling too much debt? It’s key to look at its good and bad sides first. This way, you can pick the best path for your money needs and future.

Pros of Bankruptcy

Collection Relief: By choosing bankruptcy, all those calls and mails from debt collectors stop. This offers you a chance to catch your breath.

Financial Relief and Fresh Start: Bankruptcy can mark a new beginning. It wipes away loads of debt, letting you start fresh and steer your money better.

Potential Repayment Plan: With a bankruptcy plan, you can set up a way to pay back in a doable way. It’s a chance to handle your debts little by little, making it easier on your wallet.

Relief from Overwhelming Debt: It helps to shed that heavy debt load. You might be able to cut or clear some debts. This could hand you back the reins of your financial life.

Cons of Bankruptcy

Credit Impact: Bankruptcy can hit your credit scores hard. It makes getting new credit tough. But, managing your money wisely can help you fix your credit with time.

Potential Loss of Assets: In place 7 bankruptcy, you might have to say goodbye to some assets. This happens if they’re not protected by law and are sold to pay debts. Yet, certain items, like your home or car, might be off-limits.

Lingering Negative Effects on Borrowing Ability: After filing for bankruptcy, borrowing money might not be easy. Lenders might see you as a big risk. Still, as you show you’re good with money, things can get better.

It’s crucial to think hard and talk to experts before you decide.

By weighing the positives and negatives and getting advice from those in the know, you can see if going the bankruptcy route matches your money situation.

Pros of Bankruptcy Cons of Bankruptcy
Provides relief from overwhelming debt Impact on credit scores
Halts collection efforts by creditors Potential loss of assets
Possibility of financial relief and fresh start Lingering negative effects on borrowing ability
Potential for a manageable repayment plan

Rebuilding Credit After Bankruptcy

Rebuilding credit after bankruptcy is key to getting on solid financial ground again. Even though it’s tough, there are many ways to bring your credit back up. This will help you get better credit scores.

Getting a secured credit card is one great way. This kind of card needs a cash deposit first. This makes it less risky for the card company. By using it well and paying on time, you can show you’re good at handling credit.

Another idea is a credit-builder loan. These loans are there to help you build credit back up. Paying these loans on time shows you’re dependable. It starts to make your credit look better.

Being added to someone else’s credit card can help, too. When you’re on a trusted person’s card, it can help your credit. This is because their good credit is shared with you.

Getting someone with good credit to cosign a loan might also work. This means they promise to pay if you don’t. It can help you get approved for loans easier, even after bankruptcy.

Experian Boost is a new tool that might help. It adds your utility payments to your credit report. This might improve your credit score by showing you pay important bills on time.

Remember, rebuilding your credit will take a while. Stay patient and keep your finances in good shape. This means always paying on time, not using too much credit, and avoiding more debt.

If you stick to these tips and use credit wisely, you can start building a better financial future. Even after going through bankruptcy.


Filing for bankruptcy is a big step. It’s vital to think about the benefits and downsides. This decision needs deep understanding.

Think through the good and bad before going ahead. Expert advice from bankruptcy attorneys is key. They can help guide you.

After bankruptcy, you can start fixing your credit. You can use secured credit cards and get special loans. También puedes mejorar tu historial con Experian Boost.

Bankruptcy offers debt relief, which is great. But, rebuilding credit takes time and effort. Yet, with smart money choices, a better future is possible.


Is filing bankruptcy bad?

Filing for bankruptcy is serious. It can relieve you from debt but might hurt your credit. You could also lose some property that isn’t essential.

How does bankruptcy work?

Bankruptcy helps individuals deal with their debt through a legal process. There are different kinds, like Chapter 7 and 13, with specific rules and outcomes. A bankruptcy attorney can help you with these options.

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is about selling off some assets to pay creditors. Yet, you can keep some things that don’t need to be sold. To qualify, there’s a test on your income you must pass.

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy lets you make a plan to pay back your debts over time. This plan can last three to five years. It’s based on what you can afford and needs creditor approval.

What are the key terms in bankruptcy?

Important words in bankruptcy are the 341 meeting, credit counseling, discharge, exempt property, lien, and more. Knowing these terms helps understand the process better.

What debts can’t be forgiven in bankruptcy?

Some debts can’t be wiped out by bankruptcy. These include alimony, child support, certain taxes, and debts related to damages while driving drunk. They’re called non-dischargeable debts.

What are the consequences of bankruptcy?

Declaring bankruptcy can mean losing some property, affecting your credit, and possibly not clearing all your debt. It can also affect others you share debt with.

What are the pros and cons of bankruptcy?

Bankruptcy stops debt collection and offers a new financial start. But, it can lower your credit score, mean losing possessions, and impact your future borrowing.

How can I rebuild credit after bankruptcy?

To rebuild your credit, try a secured credit card, a credit-builder loan, or Experian Boost. Being an authorized user on someone else’s card can also help. A cosigner may be an option too.

What should I consider before making a bankruptcy decision?

Think about the benefits and downsides of bankruptcy carefully. Get advice from experts. And know how it affects your credit and what you can do to improve it later.