Why Shouldn't I File Bankruptcy?

Credit Damage

When you go through the bankruptcy process, it becomes a major blemish on your credit history. If you file for Chapter 7 liquidation bankruptcy, it will remain there for 10 years, while a Chapter 13 reorganization will show up for seven years. This means that regardless of the outcome, bankruptcy will impair your ability to obtain loan approvals, rent an apartment or even get a job. Only a combination of time and responsible borrowing will repair your credit history.

The damage a bankruptcy can do to your credit report will also make it difficult for you to get a loan once you emerge from bankruptcy. However, the process itself may make it outright impossible. If you file for Chapter 13 bankruptcy, the court will approve a repayment plan that you present to pay off much of your debt over a period of three to five years. During this period, you'll need to ask permission of the court to borrow any money. This means you won't be able to open a new credit card account, finance a new car or incur any other debt unless your bankruptcy trustee decides to grant you special permission to do so.

If you have other options, you should at least wait to file bankruptcy. For example, if the biggest part of your debt consists of a mortgage loan, you shouldn't file for bankruptcy until you first contact your lender and explore options such as mortgage modification and refinancing. If you have adequate income and haven't exhausted your options, the bankruptcy court may refuse to hear your case, leaving you with legal fees and no resolution to your debt problem.

Bankruptcy laws provide for exempt property when it comes time to liquidate your assets under Chapter 7, but you still stand to lose property if you file. For example, while you may be able to keep your home at the end of the bankruptcy process, you're also likely to lose any investments or cash savings you have as the court works to satisfy your lenders before discharging the remainder of your debt. If you have large assets as well as large debt, bankruptcy alternatives such as refinancing, loan consolidation and credit counseling might turn out to be more beneficial.