Is Bankruptcy Bad or Good?

Function

When a debtor becomes unable to make minimum payments on outstanding debt, he may seek the advice of a bankruptcy attorney. If the attorney believes bankruptcy is an option for relieving the debt situation, he will file a bankruptcy petition with a federal court. Once a bankruptcy judge approves the filing, the case moves forward according to the selected bankruptcy type. In a Chapter 7 bankruptcy, a court trustee arranges a sale of the debtor's personal property and uses the proceeds to repay creditors. In a Chapter 13 case, the trustee arranges a debt repayment plan and uses the court's power to ensure the debtor makes payments on time. According to bankruptcy attorneys at the Moran Law Group, a bankruptcy discharge takes place after the trustee has disbursed as much payment as possible to the creditors.

As a legal case in federal court, bankruptcy is a matter of public information and any interested party may examine the debtor's filing. In some cases, according to the financial website BankRate, reports of the bankruptcy filing may also appear in the media. For most private individuals, though, the volume of personal bankruptcies means that the bankruptcy filing will remain unpublicized and somewhat private.

During a Chapter 7 case, a bankruptcy filer may be required to surrender a large amount of personal property. Chapter 13 filers may keep their property, but must make court-mandated payments on a repayment plan for three to five years. For seven years after a Chapter 13 case, and for ten years after a Chapter 7 case, the bankruptcy will also appear on the debtor's personal credit report, according to the major credit bureau Experian. After a bankruptcy case, though, many former debtors begin receiving high-interest credit offers almost immediately after the case becomes discharged.

For those who carry a large amount of debt, bankruptcy offers a nearly immediate stop to calls and letters from debt collectors. The filing process remains fairly unpublicized for most private individuals, and many debtors can take advantage of new credit offers after the bankruptcy court discharges the debts. BankRate notes that the bankruptcy process is not difficult to initiate, and a discharged case represents an opportunity to build a positive credit file from scratch.

Despite the benefits of bankruptcy, financial experts caution that the process can exert a tremendous toll on those who choose to file. Dave Ramsey, who dolls out financial advice on The Dave Ramsey Show, notes that bankruptcy ranks among divorce and disability as one of the most unpleasant life events. In addition, bankruptcy can lead to very high interest rates as long as it remains on the debtor's credit file, and Dave Ramsey warns that some job and loan applications require disclosure of a previous bankruptcy even if it no longer appears on the credit bureau's report.