Bankruptcy: Advantages and Disadvantages
By FindLaw Staff | Reviewed by Maddy Teka, Esq. | Last updated April 19, 2021
Declaring bankruptcy can feel like a big step in the wrong direction. Filers find relief from debts but also face new challenges to rebuild their credit and secure loans. It is also common to adjust to a scaled-down lifestyle after bankruptcy.
But bankruptcy also provides considerable relief for those buried by unsustainable levels of debt. Dreaded phone calls and letters demanding payment will cease as soon as a bankruptcy is declared.
The following is a list of advantages and disadvantages to consider before declaring bankruptcy. See Bankruptcy Basics for additional articles and resources, or speak with a bankruptcy attorney near you if you need legal assistance.
DISADVANTAGES |
ADVANTAGES |
| Most tax debt is nondischargeable | Bankruptcy can make old tax liabilities (older than three years) go away |
| Bankruptcy will lower your credit until you work to rebuild it | Missed debt payments, defaults, repossessions, and lawsuits will hurt your credit - bankruptcy can often be the easier option |
| You must wait years between bankruptcy filings (if you need it again at a later date) | You can file for a Chapter 13 plan if there is another financial disaster before you are eligible for Chapter 7 again |
| Bankruptcy will not remove student loan debt | Nothing will get rid of student loan debt but bankruptcy will prevent your lenders from aggressive collection action |
| You will lose current credit cards | Judges, attorneys, and trustees have seen and heard far worse bankruptcy stories than yours |
| Bankruptcy can initially feel defeating | Bankruptcy allows you to have a new start |
| It can feel uncomfortable to explain to a judge, trustee, and attorney how you got into your financial situation | Harassing phone calls from creditors, letters, repossessions, canceled credit cards, declined charge authorizations, and lawsuits will stop |
| Your name will be public in court records once you file | Some lenders specialize in lending to "bad risks" customers (this is their term but is an unfair characterization to make of someone who has taken a major step to solve financial difficulties) |
| You may have to wait or take extra steps to get a mortgage | Most state exemptions allow many things you own to be exempt from bankruptcy |
| You can lose some luxury possessions |