What Is the Downside of Filing for Bankruptcy?

ByJulija A.
July 18,2022

If your sources of income are compromised and you’re unable to pay your debts back, you might consider filing for bankruptcy. Bankruptcy may look like the only way to get a breather, but before you do that, you must understand what the consequences of such an action could be.

So, what is the downside of filing for bankruptcy? We will discuss that in this article, so read on.

What Is Bankruptcy?

Bankruptcy is a legal process that can be initiated when a person or business entity is financially unable to settle debts. When an individual or company files a petition for bankruptcy, the court evaluates their assets. If the assets are deemed to be of enough substantial value, they can be sold off to pay off some of the debt.

The relationship between bankruptcy and debt is a serious one. Filing for bankruptcy is a negative implication regarding your ability to pay back future debts and it affects your credit score, so you shouldn’t resort to it lightly.

To properly utilize bankruptcy in debt settlement, you should first know what types of bankruptcy exist.

Types of Bankruptcy

There are two types of personal bankruptcy you should consider when it comes to debt settlement. In most cases, it is either a Chapter 7 or Chapter 13 filing. For businesses, there’s Chapter 11.

Chapter 7

Most people tend to file a Chapter 7 when it comes to bankruptcy and debt. Filing for a Chapter 7 bankruptcy usually does not result in your property being sold to cover portions of your debt, but it is still a possibility depending on the specifics of the case. The filing takes three to five months.

Chapter 13

A Chapter 13 bankruptcy is usually filed to enable reorganization. This means that you seek some time to plan out how your debt settlement will go. It’s the less common type of bankruptcy filing. Your property or assets are not going to be sold to pay off debts, but this filing requires that you and your creditors agree to a repayment plan bound by the court. 

Chapter 11

This bankruptcy filing isn’t that much different from a Chapter 13 filing. They both involve reorganization, but while Chapter 13 is meant for individuals, Chapter 11 is applied to business interests. It is more complex than any other type of bankruptcy and gives businesses in serious debt the chance to keep operations running, while they restructure to pay off their creditors.

The cost to file a bankruptcy varies, but on average, you would be looking at around $1,500-$4,000. These cover court filing and attorney fees.

Now that we’ve considered the most common types of bankruptcy, let’s look at the pros and cons of bankruptcies.

Benefits and Downsides of Filing for Bankruptcy

Filing for bankruptcy can be a good thing, but it can also have many disadvantages. Here’s what you can gain or lose from filing a Chapter 7, 11, or 13.

Pros

Filing for bankruptcy can help you save your property or assets from being sold off to settle debts. It’s a second chance for you to handle debts without throwing your life into disarray.

Bankruptcy is a useful tool for relieving you of the legal obligation to pay off a credit facility, taking pressure from creditors off you until you’re able to reorganize your finances.

A bankruptcy filing can help your business stay in operation even when you can’t repay debts. It’s a good way to protect the income in your business checking account.

Cons

On the other hand, filing for bankruptcy can lower your credit score rating. This is one of the biggest drawbacks of bankruptcy. How low your rating can drop depends on your score. A good credit score rating is estimated to drop by up to 200 points, although the effect is less severe the lower the credit score is.

Bad credit scores, in turn, have several financial implications. It would be difficult to qualify for loans, mortgages, credit cards, or to even purchase or rent a property. If you do qualify for a loan, your interest rates would be much higher. However, there is a way out, as you could apply and get loans even with a bad credit score.

Bankruptcy Consequences

Bankruptcy may be a second chance, but it could also be a financial nightmare. For one, they stay on your credit report for a long time. Chapter 7 bankruptcies stay on credit reports for about 10 years, while Chapter 13 bankruptcies stay for about 7 years. 

Even so, the negative impacts are reduced over time, especially since filing for bankruptcy usually means some of your debt is written off.

Alternatives to Bankruptcy

Before you jump straight to filing for bankruptcy, there may be other ways to handle your debt problems.

Debt Settlement

With debt settlement, creditors agree to accept a large portion of your debt in order to settle the full balance. It is only applicable in situations where you have defaulted repayments. You can try and negotiate with your debtors on your own, or hire a debt settlement company.

Debt Consolidation

With debt consolidation, you combine various debts into one payment. You typically get more favorable interest rates and can settle debts more quickly. However, it requires you to have a credit line or a loan that you can use to pay off these debts.

Credit Counseling

This plan involves turning to credit counselors, who can help you devise a plan to manage your debt and pay it off in affordable installments. Credit counselors can reach agreements with creditors to lower interest rates and payments, so you don’t need to file for bankruptcy. However, their services are not free.

Conclusion

As tempting as it may be to jump on the bankruptcy train, it’s wise to consider if the repercussions of filing a bankruptcy are worth it. You should always keep in mind that there are alternatives, such as borrowing from family, selling off certain properties, or looking for additional sources of income. Even a change in your lifestyle can be enough for you to avoid bankruptcy in some cases.

FAQ
Can you avoid bankruptcy if you’re broke?

You may not have to file a Chapter 7, 11, or 13 if you have low income or do not own valuable property. This is referred to as you being “judgment proof.” Any disability or Social Security benefits you receive would be protected from your creditors.

Do you get out of all debts if you declare bankruptcy?

No. Bankruptcy discharge doesn’t apply to all types of debt, and that is one of the disadvantages of bankruptcy. Debts you can’t discharge include:

  • Alimony and child support
  • Certain unpaid taxes
  • Debts for death or personal injury, as well as willful and malicious injury to another person or property
  • Debts not listed in the bankruptcy filing
What are the consequences of a bankruptcy?

If you’re overwhelmed with debt, you’re probably wondering “What is the downside of filing for bankruptcy?” In short, the biggest disadvantages are: Your property could be sold off and the bankruptcy will remain on your credit report for years, which will affect your ability to qualify for loans in the future. Moreover, you won’t be able to file for bankruptcy again for another eight years.

About the author

Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.

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This is a great way to monetize your skills and knowledge. Just be sure to set your prices competitively and market your services in a way that speaks to your target group. Depending on your expertise, you could consider various potentially profitable eCommerce businesses. You can provide one-on-one courses via Zoom, for example, or pre-record lessons and charge subscriptions. Make sure to find the right medium for transferring knowledge to your audience.  Translate for Others If you know a second language, not only can you offer online courses as your eCommerce business, but you can also start a freelance translation business from home.  You can start by creating a website or blog to promote your services. As with all good eCommerce ideas on our list, acquiring new clients will take some time. You can also use social media sites like Facebook and Twitter to spread the word. When you get your first project, be sure to ask for the client's requirements so you can give them an accurate quote.  Once you complete the project, ask for feedback so you can improve your services and include testimonials as references. With a bit of digital marketing, you can build a successful translation eCommerce business. Become a Social Media Manager If you're good at leveraging social media, you don’t have to look for additional ideas for an eCommerce business - you can make money online by managing social media accounts for businesses or influencers.  Social media is a great opportunity for communicating with customers, finding new clients, and promoting your products and services. However, not everyone has the skill set needed to get the most out of their social media accounts. This is where you could come in and assist businesses to improve their relationship with customers on social media. If you have a knack for building followership, posting engaging content, and communicating with your audience, this might be the idea to pursue and build a profitable eCommerce business.  It’s advisable to choose businesses or influencers that are relevant to your niche. Promoting your portfolio website on social media could provide you with the metrics you need to impress potential customers. Start an Accounting/Bookkeeping Firm If numbers are your forte, you can turn it into a business by starting an accounting or bookkeeping firm. Many people struggle with paperwork come tax season or with day-to-day bookkeeping. If you can provide reliable service, your clients will come to depend on your assistance. You can also consider business accounting as one of the eCommerce business ideas for people comfortable with crunching numbers. While the niche boasts renowned bookkeeping companies and is saturated as a result, you can still claim a piece of the pie for yourself.  Consider working locally or collaborating with smaller companies that don’t need a large accounting team to manage their paperwork. These companies prefer working with someone who can provide their expertise and a bit of extra care and dedication.  Become an Online Fitness Trainer If you're a fitness enthusiast, you can make money by providing online fitness coaching. This is a great eCommerce website idea to pursue if you're able to build up a large following. This holds true for yoga and other types of physical activity that can be done online. Similar to those video tapes with exercises that were all the rage in the 80s, you can also record and sell training programs or create fitness plans, diets, and so on. Depending on the online fitness coaching type you provide, one medium might work better than the other.  Become a Freelance Writer, Designer, or Developer If you're a writer, designer, or developer, you can make money online by offering your services on your eCommerce website. The idea is that your site should serve as your portfolio and opportunity to promote yourself to new clients, but also as a store to accept payments for your work. While anyone can create a website in a manner of minutes with all the free website builders, these professions are still valued on the global market. Apart from creating your site, you can also join some of the popular freelance marketplaces or promote your services via social media. Become a Virtual Assistant On the same note, if you're good with computers and have some administrative skills, becoming a virtual assistant is among good eCommerce ideas to consider. Virtual assistants provide administrative, technical, or creative services to clients from their home offices. For this role, you’ll need excellent organizational skills and a willingness to dedicate time and effort to finding the right clients. You will also have to compete with some established virtual assistant companies, but if you focus on smaller businesses and entrepreneurs, you’ll be able to make more than a decent living with this option. Offer Event or Wedding Planning and Organization When it comes to profitable eCommerce business ideas, providing wedding and event organization is another service you can promote and book online. Not everyone has the time or creativity to organize everything for their big day, company outing, or kids’ party.  This is where your eCommerce site comes into play. You can offer services online and allow your customers to book through your eCommerce store.  For this to be successful, you'll need to create a large network of vendors, caterers, and other third parties. However, if you already have such service providers standing by, this business could be the right idea.  No Clients Needed If you are an introvert and prefer not to deal with clients or customers, you can still make money online. There are excellent online eCommerce business ideas you could pursue, so let's discuss those as well. Start With Affiliate Marketing Affiliate marketing is a type of online marketing where you promote other people's products and earn a commission on any sales that you generate. This can be a great way to make money online if you're able to drive traffic to your affiliate links. Just be sure to choose products that are relevant to your niche and audience. So, where do you start with affiliate marketing now that you’ve chosen it among other ideas for an eCommerce business on our list? You could create a blog, social media account, or YouTube channel where you review products from an array of brands. Having a niche market, you can tap into through your blog or account can be a great way to earn affiliate commissions, as well as build up your own brand and authority. You'll need to invest some time and effort into creating high-quality content, but if you can build up a large following, you'll be able to make a great living reviewing products online. Launch a Dropshipping Business Another excellent choice that belongs to the easy eCommerce business ideas category is launching a dropshipping business. When you dropship, you simply sell products sourced and fulfilled by a supplier. This can be a great way to get started in eCommerce with little or no investment. You just need to find a reputable supplier and set up your eCommerce store. Once you've got everything up and running, it's just a matter of driving traffic to your site and making sales. You'll also be responsible for customer service and ensuring that your shoppers are having the best experience. After all, 91% of customers will simply leave and never return if they have a bad experience with your store, which is something new businesses cannot afford. Bottom Line There are plenty of ideas for an eCommerce business that involve selling products or services. So, if you're looking to get started in eCommerce, be sure to choose the option that best suits your skills and interests. Moreover, take a closer look at the professional network that you’ve built up over the years and then decide which avenue to pursue. With commitment and effort, you can start making money online in no time!
By Vladana Donevski · June 23,2022

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