When we represent businesses and individuals who are seeking debt relief through bankruptcy, we always counsel our clients about considering the advantages and disadvantages of doing so. Although most debts will be written off, bankrupt businesses and individuals will experience substantial problems in the future when negotiating with financial institutions or obtaining any form of credit.
In the U.S. overall, roughly more than twice as many Chapter 7 “straight bankruptcy” cases are filed as Chapter 13 “adjustment of debts” cases.
The Practical Implications of Bankruptcy Include:
- In most Chapter 7 cases, all debts are discharged — legally written off with certain exceptions.
- Assets need to be relinquished and disposed of by the bankruptcy trustee (often the official receiver, who looks after the assets of the bankrupt and distributes them to creditors)
- Bank and building accounts will be frozen and controlled by the trustee
- During the bankruptcy period, accessing any form of credit is extremely difficult (and there are other restrictions)
- Credit ratings can be affected for up to six years following a bankruptcy order
What are the Advantages of Bankruptcy?
Bankruptcy enables a debtor to write off most of their debts. If the level of debt exceeds the total amount of assets held by the debtor (including any equity in their home) and repayment would take many years, bankruptcy may be preferable to other debt repayment options.
Bankrupts are Allowed to Keep most of their Assets which Include:
- In most Chapter 7 cases, everything you own is “exempt” — protected from your creditors, and thus also protected from the Chapter 7 trustee who acts on their behalf.
- Under Texas law, the following are eligible as Texas bankruptcy exemptions when filing for both Chapters 7 and 13 Bankruptcy: bankruptcy: Furniture, food, pets, Bible or other book containing sacred writings, firearms, certain kinds of clothing, jewelry, sports equipment, motor vehicles, life insurance, tools of the trade, farm animals, unpaid commissions for personal services, current wages, health aids prescribed by a doctor, insurance benefits, IRAs, 401(k)s, and other retirement benefits, Social Security benefits, and veteran’s benefits.
- Items which you need for their job (eg tools or a vehicle).
- Household items (eg clothing, bedding, and furniture).
- Money which you urgently need (eg to buy food).
- Money belonging to a partner is held in a joint account. This is given back to the partner.
- Generally, any money which you have put into a pension.
What are the Disadvantages of Bankruptcy?
Bankrupt companies or individuals will lose most of their assets and access to credit for at least a year. Their home may be sold (depending on the amount of equity). Furthermore, during the bankruptcy period, they will face certain restrictions including not being allowed to:
- Act as a director of a company (unless the court gives permission).
- Create, manage or promote a company (unless the court gives permission).
- Manage a business with a different name (unless they inform anyone they do business with that they are bankrupt).
- Work as an insolvency practitioner.
Although most debts will be written off once the bankruptcy has been discharged, monthly payments required as part of an Income Payments Agreement may need to be made for up to three years following a bankruptcy (pension payments may be taken into account).
How to Decide Whether or Not to go Bankrupt?
Individuals considering bankruptcy should weigh the pros and cons discussed above before deciding whether to proceed. If there is no prospect of improvement in their financial situations — if their debts will take many years to repay — bankruptcy may prove to be a sensible option. However, before filing, individuals should first consider alternative ways of dealing with their debt.
Potential bankruptcies should assess the consequences of bankruptcy upon the full value of their assets — particularly if they own significant equity in their home. Furthermore, certain professions (eg solicitors and accountants) apply restrictions on membership regarding individuals who have been bankrupt, so it is important to check this aspect as well.
If you’re interested in filing for Chapter 7, 12, or 13, the bankruptcy attorneys at our law firm are here to guide you through the process or as an alternative assist in seeking a different debt relief solution if bankruptcy isn’t the right path.
Get a free consultation and talk to an experienced bankruptcy attorney today. Call today or contact us via the form on our Contact Us page.