The Top 5 Pros and Cons of Bankruptcy

Pros:

1. Relief from debt

The most significant advantage of bankruptcy is that it can provide relief from unmanageable debt (meaning you’re no longer responsible for paying it), allowing you to start fresh financially.

2. Protection from creditors

When you declare bankruptcy, you get an automatic stay of proceedings, which means that your creditors are no longer allowed to pursue collection actions against you. This provides you the breathing room needed to focus on complying with your bankruptcy duties so that you can obtain your discharge from the bankruptcy and then focus on rebuilding your financial life.

3. Financial education

As part of the bankruptcy process, you’re required to undergo financial counselling. This is a great opportunity to work with an experienced professional to level up your knowledge about budgeting and managing credit, which will help you avoid future financial difficulties.

4. Quicker debt resolution

The bankruptcy process is often shorter than other debt relief processes, such as debt consolidation, credit counselling, or even a Consumer Proposal. Although bankruptcy usually remains on your credit report longer than other options, a speedy discharge from the process may allow you to start focusing on actions that will rebuild your credit score sooner than those options.

5. Opportunity for a fresh start

Bankruptcy can be a difficult and emotional process, but it can also be an opportunity to wipe the slate clean and build a more secure financial future.

Cons:

1. Damage to credit score

One of the most significant disadvantages of bankruptcy is that it can have a severe impact on your credit score. It’ll stay on your credit report for up to seven years, which can make it challenging to obtain credit during that time. However, it is possible to rebuild your credit score after bankruptcy. And often those who are facing bankruptcy are already unable to obtain affordable credit due to a poor credit score.

2. Public record

Bankruptcy is a matter of public record, which means that anyone can access certain information about your bankruptcy. This can be embarrassing and uncomfortable. That said, it’s rarely publicly advertised, so in most cases someone would likely have to go looking for the information (and pay applicable search fees) to get it.

3. Loss of assets

You may be required to surrender some of your assets to the bankruptcy trustee, including your home, car, and other valuable possessions. However, in many cases, individuals find that most of their assets are protected and/or they are able to keep up with payments to secured lenders (like a mortgage or car loan) to keep assets that have minimal equity. The trustee may also give you the option of repurchasing assets you’d like to keep.

4. Limited credit options

After filing for bankruptcy, you will not be able to access credit until you are discharged from the process. Even then, your credit options will be limited for a while due to the impact on your credit score. That said, existing secured lenders (like mortgage or car loan) usually continue to work with you, as those debts are not affected by bankruptcy. And there are some alternatives, such as a secured credit card, which you may be able to apply for.

5. Emotional toll

It’s important to recognize that filing for bankruptcy can be emotionally taxing. Just getting to the point of calling a Licensed Insolvency Trustee usually involves a lot of guilt, stress, and shame. However, most people that make a bankruptcy filing report feeling a weight lifted off their shoulders once they take this crucial step to resolve their financial difficulties, as it allows them to focus on a better financial future.

Bankruptcy is often misunderstood as an entirely destructive and shame-filled event. In reality, while bankruptcy comes with some significant consequences, it provides a lifeline for individuals with overwhelming debt. Understanding the pros and cons of bankruptcy is critical to making an informed decision about whether this option is right for you.

Charla Smith & Company Ltd. is a Calgary-based Licensed Insolvency Trustee serving the southern Alberta region. We regularly help individuals review their options and determine whether bankruptcy is the right choice. If you would like to review your options, contact us for a free, no-commitment consultation.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.