Is bankruptcy a bad thing?
When an individual or business is having financial difficulty, the experience can be incredibly emotional and stressful. Bankruptcy may be a way to help relieve this stress and provide a pathway for the ultimate resolution of one’s financial issues. While an individual can feel a certain amount of guilt for not paying creditors in full or within the agreed time for payment, whether or not to file for bankruptcy should not be a value judgment but a financial decision. Accordingly, bankruptcy should not be viewed in terms of whether it is good or bad, but rather whether it is the right choice for an individual or business to resolve financial strain.
Below are some factors to consider when deciding whether bankruptcy is right for you. If after reviewing the following factors you believe bankruptcy might be the right option for you or your business, contact a bankruptcy attorney to discuss your options.
Impact on Privacy and Personal Time
Bankruptcy can be a drawn out legal process and will require significant time and energy for both individual and corporate debtors. Many of an individual or company's financial records will become public, at which point they will be on file with the bankruptcy court or United States Trustee, will be available for creditors to review, and will be subject to scrutiny by the court, the U.S. Trustee, the Chapter 7 trustee (if applicable) and creditors. Individuals are required to take financial counseling before filing for bankruptcy, if you do not complete the financial counseling prior to filing, your case can—and frequently will—be immediately dismissed. Personal appearances will be required both before the bankruptcy court and the U.S. Trustee. Nobody welcomes such intrusions on privacy or personal time, however, it's helpful to weigh these factors against presumptious expectations of a bankruptcy filing.
Cost of Bankruptcy
Although it seems counterintuitive given that its purpose is to reduce or eliminate debt, the bankruptcy process itself can be very expensive. Fees and costs vary depending on whether a debtor is an individual or a company and depending under which chapter of bankruptcy a debtor has filed. In general, a debtor may need to pay a filing fee, U.S. Trustee fees, attorneys’ fees (both for the debtor and in certain circumstances for its creditors and/or creditor committee) and administrative costs such as photocopying, and postage. Accordingly, these potential costs should be weighed against the benefit a debtor anticipates receiving through the bankruptcy process.
Availability of Other Options
Before choosing to file for bankruptcy, individuals and companies should take a hard look at their financials to see whether the strain can be reduced by cutting down on non-essential expenses. Bankruptcy is not designed to allow debtors to live beyond their means at the expense of their creditors. Accordingly, if a debtor’s financial problems derive from individual luxury expenses or corporate distributions to equity holders, bankruptcy is unlikely to be a useful option.
If your financial issues are limited to a small number of creditors or if accommodation from a single creditor would relieve overall financial strain, negotiating with these creditors for payment reductions or term extensions may be a more efficient option than filing for bankruptcy. Depending on your relationship with a creditor, your credit history, or a creditor’s own financial situation, negotiated resolution may appeal to your creditor more than having to deal with your bankruptcy filing.
Certain types of creditors have established methods for addressing a borrower’s financial difficulty. If you are seeking relief related to your mortgage, look into the possibility of a loan modification, short sale or deed-in-lieu of foreclosure. Borrowers can also seek to defer student loan payments if they can demonstrate financial hardship. Additionally, credit card companies will often have programs allowing a debt to be reduced and paid over time. Pursuing one of these options may eliminate the need to file for bankruptcy.
Type of Debts Owed
Certain debts such as student loans, alimony, taxes, or legal judgments involving intentional injury or fraud are generally non-dischargeable. If a significant portion of your debt is non-dischargeable, bankruptcy is unlikely to be a good option for you as there would be limited, if any, relief from these types of debt.
If the debt that you seek to reduce or eliminate is guaranteed by a third party (e.g., your parents or other family members) or if you have personally guaranteed your company’s debt, your bankruptcy will not relieve the liability of the guarantor. Accordingly, even if the debt is eliminated or reduced through bankruptcy, the guarantor will remain liable for the entire debt.
Benefits of Filing for Bankruptcy
Given the foregoing, bankruptcy is likely not the best option for most people or companies in financial trouble. However, the benefits of bankruptcy for some individuals and companies may make it the right choice, such as those in the following circumstances:
- A profitable business is overleveraged or experiencing short term financial difficulties;
- A debtor lacks liquidity, but owns valuable fixed assets that can be sold to pay down debt;
- An individual has significant equity in his or her residence on which a lender is attempting to foreclose;
- Creditors are becoming excessively or unreasonably aggressive and litigious regarding debts owed;
- Litigation costs are affecting a person's ability to cover living expenses and pay other creditors;
- A debtor is party to an expensive contract or lease that it would like to reject.