Bankruptcy 101 – Pros and Cons

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Over the past decade, filing for bankruptcy has become far less taboo – good, bad or indifferent it’s become far more mainstream for both businesses and individuals. 

For individuals, there are 2 types of Bankruptcy – Chapter 7 and Chapter 13. With Chapter 7 you must have an insufficient income to allow you to pay at least a portion of your debts. Under Chapter 7, you either pay for or give up your property for secured debts. You surrender any nonexempt property in order to pay off as much of your other debt as possible. You keep all of your other exempt property and are forever released from any obligation to repay the remaining dischargeable debt.

In a Chapter 13 bankruptcy, you are not seeking to get rid of all of your debt entirely, but only to do one or a combination of the following: restructure your payments so they are more manageable, considering your income AND/OR get rid of part of your debt so that you can manage payments

This can be done by spreading your payments over a longer period of time or by paying only a part of the loan. Either way, your monthly or weekly payment will be reduced. This type of payment plan can last up to five years. This means your finances will be under the watchful eye of the trustee during this time.

Chapter 7 is the most common type, however both have similar pros and cons.

Pros

  • The biggest and most obvious pro is that you will be discharged of many of your debts. This will allow you to pay down any nondischargeable debt like student loans and taxes or items like a car or home that was not surrendered.
  • An automatic stay will be issued by the court. This means that any people or entities that you own money to will no longer be allowed to contact you to collect on the debts you own.
  • You can claim bankruptcy exemptions – these are assets that bankruptcy trustees may not seize during Chapter 7 bankruptcy filings. This means that if you file for Chapter 7, you may be able to keep such items as your house, clothing, jewelry, and a variety of other personal belongings.
  • You can not be discriminated against by an employer who does a credit check for filing bankruptcy.

Cons

  • It’s an ongoing process. Bankruptcy isn’t a simple one-step process; after it’s been filed, bankruptcy often demands certain tasks including ongoing payments, debt management classes, court dates, etc.
  • All your debt will not be eliminated. Some of your debts may remain after filing, including: back taxes, student loans, alimony and child support, Fines owed to government agencies, etc.
  • You will lose your non-exempt property. Each case is different, but this could include, your house, cars, cash, stocks, and bonds.
  • It stays on your credit report for 10 years. It may be significantly more difficult to secure a loan in the future if you have filed bankruptcy. Even if you do secure a loan or a credit card, you will more than likely have a significantly higher interest rate attached to it.
  • Filing bankruptcy costs money. There are filing fees, bankruptcy trustees’ fees, credit counseling fees, and attorney fees. The cost of bankruptcy can add up to be thousands of dollars.

Before deciding to go the bankruptcy route, you should consider talking to a financial advisor who may be able to help you get your finances in order. You may be able to take out a personal or consolidation loan to pay down higher interest debts. If you have questions on loan options available, give us a call or stop into any of our branch locations.

Stephen Yonych Jr.
Assistant Vice President, Watertown Manager
860.393.9175
MLO# 701846

Author: Stephen Yonych

A recent addition to the Litchfield Bancorp Retail Banking Group in Watertown. Steve has spent the past 6 years in retail management & lending. Steve lives in Cheshire and has been actively involved with many community organizations including the Waterbury Chamber of Commerce, Leadership Greater Waterbury, the Lyons Club, the Crime Stoppers of Water-Oak and the Greater Waterbury Board of realtors.

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