Bankruptcy was enacted by Congress to give debtors a chance at a fresh financial start from their burdensome debts. The Supreme Court made this very point about the purpose of filing bankruptcy when it wrote this in a 1934 decision:
“It gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
The overriding idea behind filing for bankruptcy protection is to protect enough of your assets in order to be able to make a fresh start. That is why state exemption laws have been made for the benefit of the debtors. Filing for bankruptcy protection guarantees certain assets for the debtors to make the new start.
Nevertheless, it is still a good idea to avoid filing bankruptcy when you can, so here are 5 good reasons to avoid filing bankruptcy if at all possible:
Not all your assets are protected: Depending on which bankruptcy you file, and depending on whether you use state or federal exemption laws, not all assets are protected against liquidation. You can lose a house, your cars, some retirement accounts, and any asset that is not protected by full exemption amounts when you file. In some situations, you may not lose these assets through other court avenues.
Not all debts are discharged by bankruptcy: Obligatory debts such as student loans, certain tax debt, child or spousal support, certain court orders, and fraudulent debt cannot be discharged in most circumstances in a bankruptcy. An exception of these bankruptcy laws can be made for undue hardship if the debtor can prove their case before a bankruptcy court. If much of your debts are in these categories, it may be wise to forgo filing bankruptcy.
Your credit score will take a bad hit for up to 10 years: Filing bankruptcy stays on your credit score for up to 10 years. The initial filing can cause your credit score to tumble as much as 250 points if your scores have not already done so. People can live without good credit scores, but good scores help you in making various loans and obtaining rental property.
Creditors can foreclose or repossess your property: The automatic stay of bankruptcy prevents any collection activity like foreclosure and repossessions during the bankruptcy process, but most secured liens are held with the condition that filing bankruptcy is a default of the loan, regardless of your payment history. That means the creditors can start the foreclosure or repossession process as soon as the automatic stay is lifted.
There may be debt relief alternatives to filing bankruptcy: Sometimes doing nothing, negotiating with creditors, debt settlement, and debt management can all be alternatives to filing bankruptcy, depending on your particular situation.
Although filing for bankruptcy protection is the Constitutional right of every American, you might want to avoid filing if you can. Bankruptcy laws are complex and each individual situation is different. It would be wise to consult with an experienced bankruptcy attorney before deciding to file.
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