Weighing the Costs and Benefits of Bankruptcy

For some people, bankruptcy is a dirty word, and they do not want to confront even the possibility that they might need to declare bankruptcy to deal with their debts. And yet, in the wake of the coronavirus, even people who were previously financially secure have been pushed into situations where bankruptcy seems like an inevitability. Before you decide whether it might work for you, however, you should make sure you understand the costs and benefits of declaring bankruptcy.

Broadly speaking, bankruptcy refers to a collection of legal processes by which a person or business can declare they have more debt than they are able to handle and require legal assistance to protect themselves from their creditors. For individuals, there are two primary forms of bankruptcy, designated by the part of the Bankruptcy Code they are regulated by: Chapter 7, also known as a liquidation bankruptcy, and Chapter 13, also known as a wage earner’s plan. Businesses also have Chapter 7 available to them, but have another kind of bankruptcy they can access, Chapter 11 (which can be either a reorganization or liquidation bankruptcy).

Chapter 7 bankruptcy is what most people think of when they discuss bankruptcy. It refers to the process by which a person or business sells off their non-exempt assets to satisfy the demands of their creditors. Chapter 11 and Chapter 13 bankruptcies, on the other hand, generally involve submitting a financial plan approved by the court, which you must then follow as best as you can. In the case of both Chapter 11 and Chapter 13 bankruptcies, so long as you follow the plan, you can continue to work or operate your business and still gain the benefits, including a pause on any collection actions a creditor can take against you.

Regardless of what kind of bankruptcy you declare, however, you still receive certain benefits. First, you always receive the benefits of bankruptcy protection, meaning that creditors cannot go after you for your outstanding debts during the time your case is active. Your assets cannot be seized without approval by the court, and you cannot be evicted from your home or apartment without a specific court order. You can also be certain you will retain certain exempt property, potentially including your family home and car, even if you undergo a Chapter 7 bankruptcy.

Additionally, once you successfully complete your case to the court’s satisfaction, regardless of what form of bankruptcy you undergo, all remaining debts are discharged. This means that, with a handful of exceptions, creditors cannot go after you for any debts you had prior to declaring bankruptcy, regardless of how much of the debt you pay off. If they try, you can seek the protection of the court to prevent your wages from being garnished or your assets from being seized, and the court can impose penalties on creditors who seek to collect debts that are covered by a discharge.

However, there are major downsides, even in Chapter 11 or Chapter 13. First, your ability to conduct your own financial affairs will be severely limited, as you will need to seek the approval of the court for any major financial transaction, and particularly if you want to obtain a loan or other form of credit. In the case of Chapter 11 or Chapter 13, you will also need to regularly report to the court to ensure you are remaining on schedule with your reorganization or debt restructuring plan.

There are also certain kinds of debts that cannot be discharged through bankruptcy. For example, child support and spousal maintenance payments will remain even after you have completed the process. Certain kinds of unpaid taxes or court judgments may also remain. However, the only way to know for sure how it can help you reduce your debt is to seek the guidance of a bankruptcy attorney.

Additionally, bankruptcy can have a serious, long-term impact on your credit, making it more difficult to obtain loans, mortgages, credit cards, or other kinds of financing. A bankruptcy filing of any type can remain on your credit reports for up to seven years. This can make it much harder to do things like get a higher education, purchase a house, or do anything else that requires borrowing money. However, at the very least you will no longer be saddled with your old debts, which can help to counterbalance the negative impact of the bankruptcy on your credit.

The attorneys at Hunziker, Jones & Sweeney understand that financial distress is an extremely emotional and difficult time for anyone to go through, whether as an individual or as a business. Although our offices are presently closed to the public, our attorneys are available for remote consultation. If you are experiencing severe financial distress and may be considering bankruptcy as an option, or want to know more about what a bankruptcy filing may do to help you or your business, call The Law Offices of Hunziker, Jones & Sweeney at (973) 256-0456 or fill out our contact form for a consultation.

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