Why Avoid a Bankruptcy?

Immediate Considerations

If your intent is to absolve your legal responsibility toward debt, bankruptcy may not accomplish your objective. The most common forms of personal bankruptcy are Chapter 7 and Chapter 13, only one of which absolves financial responsibility. If you do not meet filing requirements to clear debts in a Chapter 7 bankruptcy, your only option is to file under Chapter 13. Instead of clearing debt, this version requires you to repay most of your debt over a period of three to five years.

No matter which type you file, there is a financial cost to bankruptcy. First, there are two fee-based credit counseling requirements you must meet, each of which averages $50 to $100, according to the Federal Trade Commission. Counseling agencies may, however, waive this fee if you ask for and qualify for a fee waiver. There is also a bankruptcy filing fee that, as of 2011, is $299 for a Chapter 7 bankruptcy and $274 for Chapter 13. Both types offer an installment option if you cannot afford to pay the fee in full at the time you file. In addition, if you qualify, it is possible to waive the fee for a Chapter 7 bankruptcy. However, fee waivers are not an option in a Chapter 13 bankruptcy. Finally, there are bankruptcy attorney fees to consider. Although having an attorney is not a requirement for filing personal bankruptcy, the FTC strongly recommends you do. Attorney will fees vary, an average of $1,000 to $2,500 is usual, according to BankruptcyLawFirms.com.

Neither Chapter 7 or Chapter 13 bankruptcy allows certain types of debt. This includes tax bills, student loans, alimony or child support and fines. If you file Chapter 7 bankruptcy, you will lose property. Asset liquidation is a feature of Chapter 7 that allows your creditors to get at least some of the money you owe. The only way to avoid property loss is by reaffirming, and then repaying the debt. In a Chapter 13 bankruptcy, any secure debt you do not include in a repayment plan is subject to seizure. If you fail to follow through on the terms of your repayment plan, creditors can once again begin collection efforts.

A bankruptcy remains on your credit report for 10 years. This can affect your ability to get any kind of credit, including credit cards, a car loan, a mortgage or even insurance. In addition, an increasing preference among property owners, employers and utility companies to check credit can make renting or finding a job more difficult -- as well as increase the amount of deposits companies require.