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Tuesday, November 11th, 2008

by Theodore Sliwinski, Esq.

The Disadvantages of Filing for Bankruptcy

As a New Jersey bankruptcy attorney helping people file for bankruptcy, I have seen all types of financial problems and counseled thousands of people on their debt relief options. Each bankruptcy case that I handle has it’s own “twists and turns.” Moreover, the amount of debt differs, and the reasons why a debtor must file is endless. However,  the common theme of almost all of my bankruptcy cases is that my clients have too much credit card debt. Most of my clients simply can’t keep up with their credit card payments. Their credit card payments simply can’t keep up with the interest that the credit card companies are charging them. It is vicious trap, and many clients feel that they are caught in this “rat trap.”

I have helped thousands of New Jersey-ites wipe out millions of dollars in credit card debt. I earnestly believe that filing for bankruptcy is a responsible solution that can wipe out or reduce credit debt as well as provide you a fresh financial start. For those debtors who have serious debt problems and who are facing foreclosure, the repo man, IRS problems, tax debts, child support arrears, or massive amounts of credit card debt, then filing for bankruptcy can help you regain control of your life. In my almost two decades of practice I have seen much more advantages to filing for bankruptcy than disadvantages. Nonetheless, filing for bankruptcy whether it is a chapter 7 or a chapter 13, does have some significant drawbacks. However, in 18 years of practice I have never received a phone call from a client who advised me that he regretted filing for bankruptcy. On the contrary, most of my clients advise me that filing for bankruptcy was one of the best decisions they have ever made. Moreover, these clients go on and on about how much their quality of life has improved since filing for bankruptcy. Wouldn’t be nice to be able to answer your phone again? Wouldn’t it be nice to be able to look forward to reading your mail?

In every bankruptcy consultation I am usually asked what are the disadvantages of filing for bankruptcy. If I am not asked this question, then it is my duty to advise any potential client of the potential disadvantages of bankruptcy. Bankruptcy is serious business and it should not be taken lightly! A bankruptcy filing can have a lasting impact on your life for a decade or more. The biggest drawback to filing for bankruptcy is that it damages your credit score. However, most people who are “in debt up to their eyeballs” already have terrible credit to begin with. Their credit is usually bad and beyond repair. If you are considering filing for bankruptcy, then your credit report probably is already terrible and it can’t be fixed. In most cases, a bankruptcy will not make your credit report any worse than it already is. On the contrary, in many instances filing for bankruptcy will improve a person’s credit report, provided that he pays his rent, car payment, mortgage payment, and any other debt on a time basis after he files.

Once you file for bankruptcy then this legal event will remain on your credit report for up to ten years. This usually means that you might not be able to obtain additional credit for a certain period of time. However, it is important to note that late payments and other negative information such as a foreclosure, repossession, and late credit card payments can also remain on your credit report for just as long. Moreover, if you plan to purchase a car or a house in the near future or immediately after filing, then it may be difficult to obtain a car loan or a mortgage, especially in this difficult economy. However, obtaining credit after bankruptcy is not as difficult as the credit card companies would lead you to believe. In many respects, a bankruptcy will actually improve your credit score.  Bankruptcy often improves your credit rating because a chapter 7 provides for a discharge of your credit card debts no more than once every eight years. Therefore, potential lenders are fully cognizant that any credit applicant who has already received a chapter 7 discharge cannot repeat this process for almost another decade. Thus, the risk of extending credit is significantly reduced.

If you incur any new debts after you file for bankruptcy then they must be fully paid. Even if there is an emergency, such as the loss of employment, or an illness that incurs a significant amount of medical bills, then you won’t be able to use bankruptcy to wipe out these debts.

If you have any co-signers they will still continue to be liable for the debts that co-signed  with you. Even if you file for a chapter 7, your co-signer will still be fully liable for any of your joint debts. The creditors love to “go after” and sue co-signers after you have filed for bankruptcy.

Before you file for bankruptcy, you should take sufficient time to review your entire financial situation with an experienced bankruptcy lawyer. At this consultation, a bankruptcy lawyer can provide you with straight and honest answers about the pros and cons of filing. You should carefully weigh the current advantages of filing for either a chapter 7 or a 13.  A chapter 13 is usually filed to  to stop a foreclosure and to save your home, or to stop care repossession and to save your car. Meanwhile, a chapter 7 is usually filed to wipe out credit card debts and to obtain a fresh start. After this meeting,  you should consider the advantages of filing for bankruptcy against the disadvantages. Moreover, you should discuss your financial predicament with a bankruptcy attorney, even if you intend to file by yourself. The new bankruptcy code has become extremely complicated, and the pre-filing requirements that are required are not as simple as filling out a few bankruptcy forms. It is simply stupid to file bankruptcy by yourself. But if you have no choice, then at least have a consultation with a bankruptcy lawyer before you file your case pro se.

Therefore, if you are considering filing for bankruptcy to stop a foreclosure, stop repossession, to wipe out credit card debt, or to just start over then consider the following:

A. Your Credit Report

Most marks on your credit report will stay there for seven years. However, a bankruptcy will stay on your credit report for ten years. Nonetheless, a bankruptcy filing enables a debtor to obtain a fresh start and to rebuild his credit. Meanwhile, late payments, unpaid credit card bills, judgments, and charge offs also ruin your credit. To many lenders a person who has filed for bankruptcy and then pays his bills timely, has a better credit report then a person who has late payments, large credit card balances, or judgments.

B. Potential Employers

Although it is a violation of federal law to discriminate against you if you have filed for bankruptcy, it can be taken into consideration by a potential employer when offering you new employment. In today’s world most large companies review your credit report before they hire you. Many potential employers may believe that if you have filed then you are are careless and not disciplined. Moreover, if you are employed with Federal law enforcement or with the military, then if you have a bankruptcy on your record, then you may lose your security clearance. I have heard stories from my clients wherein they have lost job opportunities because they have filed for bankruptcy. Moreover, many banks and financial institutions will not hire you if you have filed.

C. The Loss of Assets

There are certain circumstances where a person may lose some of their assets or personal property to the bankruptcy trustee. This rarely happens, but when it does it is likely because a person filed without the assistance of an experienced bankruptcy lawyer. Most experienced bankruptcy lawyers know the “ins and outs” of the system, and they can advise you what assets you will be able to keep, and what assets you may lose.

D. The Bankruptcy Stigma

There is a stigma related to filing for bankruptcy. A generation ago, filing for bankruptcy was considered to “being a loser in life.” In the past, filing for bankruptcy was shameful and embarrassing. In the 1950’s and 1960’s if you filed for bankruptcy then this stigma would haunt you for the remainder of your life. However, it is important to emphasize that in these “good old” times, there were no credit cards, no adjustable rate mortgages, no car loans with 18% interest rates, if you became sick it did not cost you $100,000 for a week long stay in the hospital, the divorce rates were much lower, and gambling and casinos were not everywhere.

Filing for bankruptcy has a much less of a stigma then it had a generation or two ago. In today’s world filing for bankruptcy is really “not that big a deal.” Moreover, filing for bankruptcy is much more common in today’s world. The cold hard reality is that millions of hard working Americans file for bankruptcy each year. The economic times have drastically changes from a generation or two ago.  Regretfully, the “American Dream” has died for many of my fellow citizens. If the prior generations faced the economic challenges that we know encounter, then millions of Americans from past generations would have filed as well.

E. Your Bankruptcy File becomes a Public Record

If you file for bankruptcy then it becomes a public record. There is no way to expunge a bankruptcy from your record, or to remove your bankruptcy from the public records. It is impossible to hide the fact to the outside world that you have filed. In today’s world many of your potential employees, enemies, competitors, or creditors may search the public records to obtain info about you. Moreover, a potential spouse could run a public records search on you to discover some background information about you. However, the newspapers and community publications don’t publish bankruptcy filings.

While filing for bankruptcy clearly has some disadvantages, it is a choice that only you can decide to make. If you are faced with losing your home, your car, or your peace of mind, then filing for bankruptcy is a very responsible way to obtain a fresh start in life. The advantages and disadvantages of filing for bankruptcy should be only be weighed with the careful advice of an experienced bankruptcy lawyer.