The Potential Drawbacks of Not Filing for Bankruptcy

The impact on U.S. consumers with overwhelming debt from credit cards, student loans, personal loans, auto loans, and mortgages right now is crushing. These consumers are in, or are entering, a personal debt crisis. 

If you are one of the many who are experiencing this, you may not know that bankruptcy is a very viable option for you. Or perhaps you feel there’s too much of a stigma surrounding it.

The truth is, the stigma around bankruptcy has lifted considerably over the past two decades since the Great Recession. And the drawbacks of not filing for bankruptcy if you’re eligible can be devastating. Especially in the long term.

Being ‘Judgment Proof’ May Not Save You

There are occasions where filing for bankruptcy may not be the best choice. At least, not in the moment. For example, if you have no property or assets, or you have a very low-paying or no job, there is nothing  creditors can take. In this case, you would be considered “judgment proof”  and could avoid filing for bankruptcy.

This is often ill-advised by experienced bankruptcy attorneys because being judgment-proof is often a temporary situation. For instance, you might be out of a job now but employable in the future. With this in mind, there’s good reason to file for either a Chapter 7 or Chapter 13 bankruptcy.

What Is Chapter 7 Bankruptcy?

Sometimes referred to as ‘liquidation’ or ‘fresh start’ bankruptcy, Chapter 7 is filed by individuals looking to eliminate overwhelming debt by liquidating non-exempt assets to repay creditors. It is the least complicated, most common, and fastest type of bankruptcy and typically takes three to four months to complete.

A court-appointed trustee who oversees your case handles the liquidation and distribution of your assets. An automatic stay is put in place to stop collection activities and meet with your trustee and creditors to determine your financial situation. If you meet all the requirements of filing for Chapter 7 bankruptcy, the court issues a discharge order and you’re freed of your legal obligation to pay most of your unsecured debts to give you a fresh start. 

It’s important to understand though that Chapter 7 does NOT provide a payment plan to repay creditors. That route is provided through a Chapter 13 bankruptcy.

Should You File for Chapter 13 Instead?

If you have enough steady income to offer partial payments to creditors, a bankruptcy attorney may advise you to consider filing for Chapter 13 instead.

Known as “budget-friendly debt reorganization,” Chapter 13 allows you to repay some debts in smaller amounts on a specific payment plan. The money you save from this ‘reorganizing’ of funds can be used to catch up on overdue car loans, mortgage, or other secured payments so you can keep your property and assets rather than having to sell them off.

What Are Some Possible Drawbacks of Not Filing for Bankruptcy?

Once again, unless you are judgment-proof and intend to be that way for a long time, there are considerable drawbacks to not filing for bankruptcy. Such as:

1. Hounding from Creditors and Collectors

You can expect frequent harassment from creditors who will relentlessly send notices and call you about your unpaid debt. Eventually, your debt may be sold to a third-party collection agency who will be even more aggressive in going after you.

In addition, you will continue to be subject to late fees and high-interest penalties on the balance of your current debt.

2. An Array of Negative Legal Consequences

You may experience wage garnishment from your paycheck, a bank account levy to seize funds from your bank account, a lien on your house or other property that allows creditors to collect from the proceeds once it’s sold, and the possibility of foreclosure and repossession for unpaid secure debts such a mortgages and auto loans.

A creditor can even sue you to collect the debt. If they’re successful and win, the court will issue a judgment against you that can be enforced for 10–20 years.

3. Devastating Long-Term Outcomes

Looking at the situation more long-term, doing nothing rather than filing for bankruptcy could result in significant credit damage. Prolonged unpaid debts, collections, and judgments will have a negative impact on your credit score that could last for up to seven years. That means getting a loan, a mortgage, or even renting could be a lot more expensive (or even impossible) down the road.

Plus, without the structured debt relief that comes from bankruptcy, you’re more prone to a repeating cycle of debt, which will make it more difficult to save money and improve your finances.

And last but not least, the stress of overwhelming debt can place a heavy load on your personal and family relationships. This isn’t a factor you may have considered. But it’s an important one. Especially in the long-term.

Hiring a Skilled Bankruptcy Attorney Will Help

When filing for bankruptcy, there will be the inevitable drops in credit scores and temporary difficulties in leasing a home, opening bank accounts, and other financial activities, but only a while. But the drawbacks of not filing for bankruptcy are far more severe and will last longer.

The easiest way to determine whether Chapter 7 or 13 is right for you is by speaking with an experienced and qualified bankruptcy attorney who can help you weigh and balance your needs. 

Our attorneys are here to help. We invite you to contact us today at 248-462-7986 to schedule a free initial consultation. You can also connect on our email form, if you prefer. Don’t hesitate any longer.