DISADVANTAGES OF BANKRUPTCY
Despite all of the advantages that bankruptcy may provide, there are many valid reasons for choosing not to file a petition. Some of these concern problems in the cases of particular debtors; others relate simply to the fact that bankruptcy is not the only means to address the debtor’s legal problems and may not be necessary.
LOSS OF PROPERTY
One consequence of a Chapter 7 bankruptcy is the loss of nonexempt property or its value in cash. This is not a problem for many debtors because individual debtors typically don’t have any nonexempt property. However, if you have any expensive collectible items, or large equity in your real estate, or other nonexempt property, it will be subject to being taken and sold by the Chapter 7 Trustee to help satisfy your debts. In those cases, a Chapter 13 bankruptcy often presents a viable alternative through which you may retain your possessions.
EFFECT ON CREDIT AND REPUTATION
A bankruptcy will be part of your credit history for as long as the law allows. Currently, that is, 10 years under the Fair Credit Reporting Act. This means that anyone who requests a credit report will be informed of the bankruptcy filing. The effect this will have on future credit cannot be predicted, but it is an understandable concern of many people who are considering bankruptcy.
There is no definite response to this concern. However, if you are already contemplating bankruptcy, the likelihood is that you now have or soon will have bad credit from the amount of debt to income ratio, late pays, write-offs, or other reportings from creditors. As bankruptcy has become more prevalent in the United States, creditors have increasingly considered it only one factor in their decision about granting credit, and most have chosen not to automatically exclude the ever-growing number of people who have filed a bankruptcy case. Even mortgage lenders are often willing to disregard a bankruptcy that is more than a few years old.
Many people are concerned about reputation and standing in the community or how one might be viewed by the family if they file bankruptcy. In today’s society, bankruptcy’s effect on reputation in the community is almost always imperceptible. In a small town, however, especially if debts are owed to local people, the stigma of bankruptcy cannot be entirely discounted. The potential harm can only be evaluated locally, on a case-by-case basis, and weighed against the advantages that bankruptcy offers.
Many people worry that contemplation of bankruptcy is a failure on their part: a failure to take care of a business, of their family, of their obligations and duties. However, the idea of forgiveness of debts and discharge of obligations is not a new concept nor an immoral concept. It has been around since the time of Leviticus with the Year of Jubilee. Further, in most instances, the most responsible and protective thing that you can do to protect your family is to face your obligations head on and deal with them, instead of allowing them to bring you and your family down. By addressing your debt situation, no matter the reasons behind why it arose, you are doing the best thing that you can and the most responsible thing for your family.
POSSIBLE DISCRIMINATION AFTER BANKRUPTCY
Closely related to the problem of reputation is that of discrimination against debtors who have filed bankruptcy cases. To a large extent, the Bankruptcy Code deals with this by stating that government bodies may not discriminate on the basis of a bankruptcy or because of a debt discharged in bankruptcy. Thus, a housing authority or grantor of government assistance benefits cannot deny benefits to a person based on previously discharged debts. Similarly, utilities may not deny service based on a bankruptcy or discharged debts, though they may demand a security deposit for continued service. Private employers may not discriminate with respect to employment or terminate employment solely based on bankruptcy or discharged debts. Debtors can rest assured that the law protects them in this regard and that they will be able to enforce their rights in court, if necessary.
However, there are possible negative affects post bankruptcy. There is a distinction between discrimination based on bankruptcy and discrimination based on future financial responsibility. That is, even creditors who are precluded from discrimination based on bankruptcy may refuse new credit or other services if the refusal is properly based on other considerations. For example, almost all credit unions will refuse to allow you to continue to be a member with privileges once you have cost them money through a bankruptcy discharge.
FAILURE TO SOLVE THE UNDERLYING PROBLEM
The biggest disadvantage to a bankruptcy is that, while it may deal with the existing debts and obligations, it may not solve the underlying issue. Bankruptcy may simply the wrong tool to use, and none of the advantages will be realized. An example might be a debtor whose only debts are secured debts that cannot be changed and who does not have sufficient income to make the required payments. Another is a debtor whose expenses, even the most reasonable and stripped down expenses, are not met by the debtor’s income.
The problem of debtors in this predicament is often that their current expenses exceed their income. Because bankruptcy (except for Chapter 13’s ability to stretch out or reduce certain types of short-term expenses) basically deals with assets and liabilities, it does not address this problem directly in most cases.
The opposite situation can also sometimes cause problems. If a debtor has substantial and valuable nonexempt property, a premature bankruptcy will generally hasten property loss rather than prevent it. Because unsecured creditors must sue the debtor to obtain judgment liens or levies on the debtor’s property, loss of the property outside bankruptcy may be quite slow. On the other hand, liquidation of nonexempt property generally occurs quickly in the bankruptcy process. And, because unsecured creditors are entitled to the present value of nonexempt property in Chapter 13, a case under that chapter would be quite costly. In this situation, the best option may be to wait or to directly negotiate with those outstanding creditors.
Some debtors may be barred altogether from filing a bankruptcy for some period of time. Some debtors may stand to gain little from a Chapter 7 bankruptcy because they cannot receive a discharge due to a prior bankruptcy. For these people, the prospect is somewhat brighter. In most cases, a Chapter 13 case can still provide significant relief.