If you are considering filing bankruptcy you are no doubt considering all the pros and cons, and you realize that it is a major financial decision that should not be made without fully understanding the consequences. Filing bankruptcy is a last resort, and it should not be used to simply discharge a few thousand dollars of debt that you do not wish to repay. After you consider the actual costs of filing: hiring a lawyer, paying the filing fees, paying for debt counseling, you should also consider the intangible opportunity costs before deciding if bankruptcy is right for you.
If you were a business and you filed bankruptcy the intangibles might be easy to assess: lost revenue, lost opportunities and lost good will. For example, American Airlines is an example of a company who is incurring these costs right now as many of their customers are shifting to other airlines such as Southwest Airlines.
The bad news for American Airlines is that even before they filed bankruptcy they begin to experience some of the indirect and opportunity costs of their financial distress. In a recent article in the Journal of Financial Economics, the authors outlined how many companies will experience a “slow erosion of value” more often than a sudden collapse, similar to what Lehman Brothers experienced.
But what about you as an individual? The most common question we get on our bankruptcy forum is, “What is the cost of filing bankruptcy?” But I doubt many debtors are really asking about the intangible opportunity cost. They simply want to know how much money they will have to pay to file the bankruptcy petition and potentially hire a lawyer.
So what are the intangible opportunity cost you should consider? The most important intangible opportunity cost is what bankruptcy will do to your credit rating. Bankruptcy will remain on your credit report for 7 to 10 years. It will immediately lower your credit score and will make getting credit more difficult and potentially much more expensive.
Filing bankruptcy can also generate a great deal of stress. Forms must be completed, you must appear at a creditor’s meeting and you must meet with your legal team. Mental stress may also be common for debtors who feel that they have failed in some way for not being able to pay their bills. Although this intangible opportunity cost seems to be decreasing as more and more debtors seek bankruptcy protection and the reason that many debtors must file may be completely out of the debtor’s control, such as a severe health condition which generates massive medical bills or an unexpected job loss.
What’s the bottom line? Before you file bankruptcy consider both the actual cost and all the intangible opportunity cost. Talking to a bankruptcy lawyer and have them review your financial situation. Most good bankruptcy lawyers can objectively analyze your debts, income and other factors to determine if there is an alternative to bankruptcy which may be right for you.
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