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Why is bankruptcy a last resort?

By David Yen on May 08, 2018
man standing outside court house

This guest blog post was written by David Yen, a bankruptcy attorney at LAF.

If you are in financial trouble, you should find out what your options are as soon as possible. Bankruptcy might be one of the options that you consider.

But bankruptcy is a drastic step, and the decision to file for it should not be made lightly. You should think carefully before taking any action. You can use this tool to help you decide if bankruptcy is right for you, or see if there is legal help in your area. If you are still unsure after doing so, or if your situation is complicated, you should consult an unbiased attorney.

Here are some things to consider before filing for bankruptcy:

#1 It will impact on your credit

The fact that you filed bankruptcy stays on your credit report for 10 years. This may not matter if your credit record score is already very low. But it is something to be aware of. Learn more about credit reports and scores.

#2 Your personal financial information is made public

All of your property will be listed in the files for your bankruptcy case. There are no exceptions. You are required to file documents (“schedules”), under oath, that list all of your property and debts. These documents are public records.

Also, as soon as you file bankruptcy, credit bureaus and many large creditors receive notice of the fact that you filed bankruptcy.

#3 There are limits to what bankruptcy can do

A bankruptcy is designed to give someone a second chance at handling their finances. You can keep some or all of your property if you follow the rules, but you may have to give up some of your property. And some of your debts, such as child support, criminal fines, some taxes, and most student loans, will not be canceled (“discharged”).

Also, any new debt that you have after you filed bankruptcy cannot be included in a bankruptcy case, even if the debt is made while your bankruptcy case is pending. If you don’t have insurance against an event that will cause a financial loss, you will be responsible for that debt and unable to file bankruptcy on that debt for a while (see below).

#4 Bankruptcy might not be the best way to handle your debts

There are other ways to handle your debts. If you are being asked to pay a debt, you may have legal defenses that would mean that you would not have to pay. You may have a legal defense that you don’t know about.

Even if you agree that you owe a debt, the company or person that you owe the money to might not be able to force you to pay the debt if you don’t have enough income. Learn more about money a debtor can protect from collection.

If you file Chapter 7 bankruptcy (the most common choice) and then regret it, you have to get court permission to dismiss the bankruptcy.

#5 You won’t be able to file for bankruptcy again for a while

If you are able to discharge (wipe out) debts in a bankruptcy case, you cannot file another bankruptcy case for 8 years (or sometimes 4 or 6 years), depending on what kind of bankruptcy cases are being filed. Learn more about waiting periods for bankruptcy.

#6 Timing is important

Often there will be a reason to act quickly that you know about, such as a court date or a deadline in a legal document. If you miss the court date or deadline you may have to pay even though you had a legal defense. If you wait too long before filing bankruptcy you may not be able to get the full benefit of a bankruptcy. For example, if you wait until a court judgment is entered against you.

Sometimes it is better to wait to file a bankruptcy. Sometimes doing very little or nothing right now is the best option. But waiting should be the result of an informed, conscious process, not because of fear or indecision.

This information is posted as a public service by Illinois Legal Aid Online and its partners. Its purpose is to inform people of their legal rights and obligations. Talk to a lawyer if you have questions about how this information applies to you.