What Are the Pros and Cons of Filing Bankruptcy

Payment Plan Available | Se Habla Español

What are the pros and cons of filing bankruptcy? Let Chang and Diamond, APC explain all you need to know about this topic. Call us today for more information.

The Pros and Cons of Filing Bankruptcy Explained

Filing bankruptcy is a common strategy for discharging debt. According to data from the American Bankruptcy Institute, over 35,000 individual bankruptcies were filed in just September of 2023. While bankruptcy offers relief to those burdened by unmanageable debt payments, it does have consequences.

Bankruptcy offers the opportunity to start fresh. However, it can affect your credit for a number of years, limiting your eligibility for financing. Before you declare bankruptcy, it is vital to understand all of the implications. Speaking with a credit counselor, debt settlement company and an experienced bankruptcy attorney can help you make an informed decision.

At Chang & Diamond, APC, our bankruptcy pros are dedicated to helping you learn the bankruptcy basics. Contact us today for a free, personalized consultation.

Chapter 7 vs. Chapter 13: What’s Best for You?

Individual bankruptcies are governed by federal law. This means that you will file bankruptcy in federal bankruptcy court. However, any property that is exempt in bankruptcy is based on California law, not the federal exemptions provided in the U.S. bankruptcy code.

There are six categories of bankruptcy. Chapter 7 and Chapter 13 are the most commonly used types of bankruptcy. Understanding the differences between Chapter 7 and Chapter 13 bankruptcy and the 4 ways to file bankruptcy is vital for making an informed decision.


Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also referred to as a “liquidation bankruptcy.” During a Chapter 7 bankruptcy valuable property is sold in order to pay your debts.

Certain assets are protected from a Chapter 7 liquidation in California. Common bankruptcy exemptions include:

  • Homestead exemption. The value in your primary residence up to $600,000.
  • Motor vehicle exemption. The value in a motor vehicle up to $3,625.
  • Retirement and pension benefits. Certain public pensions and retirement accounts are exempt from bankruptcy. You should check with your retirement fund before you file for bankruptcy to determine whether all or some of these funds are exempt.
  • Personal property. Household furnishings, tools, instruments, jewelry, heirlooms and works of art are exempt up to a certain dollar amount depending on the category of the item.

A Chapter 7 bankruptcy filing will typically stay on your credit report for 10 years from the date of filing. This can have serious implications for your future credit options. A bankruptcy lawyer can help you explore alternative options and ways you can avoid bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is also called a “wage earner’s plan.” This type of bankruptcy is for individuals with disposable income available to settle debts.

In a Chapter 13 bankruptcy case, the debtor works with a bankruptcy trustee and debt collectors to create a repayment plan. You will still need to pay creditors, but your monthly payments will be determined by your projected disposable income over the next three to five years. You will also need to receive credit counseling from an approved credit counseling agency.

If you are facing foreclosure on your home, Chapter 13 can be a good option. A Chapter 13 bankruptcy filing places an automatic stay on the foreclosure process. However, it is important to remember that a Chapter 13 bankruptcy will remain on your credit report for seven years.

The Pros of Filing for Bankruptcy

Bankruptcy offers an opportunity for indebted people to start fresh and there are a number of benefits to declaring bankruptcy. Not only does bankruptcy discharge you of certain debts, but it can help you secure certain assets, saving them from debt collection.

Financial Fresh Start

Bankruptcy can wipe out a number of unsecured debts including credit card debt, personal loans and medical bills. It also provides you with opportunities to restructure secured debts, like your car loan.

Stop Creditor Harassment

While you are struggling to pay your debts, you may also be receiving endless phone calls, letters and emails from creditors. Filing for bankruptcy provides relief from creditor harassment. It can also halt or delay debt collection processes like car repossession, foreclosure or eviction. 

Asset Protection

Bankruptcy can help you protect all or most of your assets, providing permanent relief. Many Chapter 7 bankruptcies are deemed to be “no asset” due to the various exemptions available and the high value of these exemptions.

The Cons of Filing for Bankruptcy

Choosing to file bankruptcy can offer relief, but it does come with consequences. Significantly, bankruptcy can have a long-term effect on your credit, personal finance decisions and be emotionally distressing.

Credit Score

The most obvious and long-term consequence of filing bankruptcy is the effect on your credit score. Typically, you will lose between 130 to 150 points. If you had a high credit score at the time you filed bankruptcy, your score can drop over 200 points.

Depending on the type of bankruptcy, it can stay on your credit report for up to ten years. This can make it difficult to obtain financing. If you do get a loan, it will likely come with a high interest rate. Making on-time payments on a secured credit card is one option to rebuild your credit score during this time. 

Loss of Certain Assets

Under Chapter 7 bankruptcy, valuable assets are sold to repay some of your debt. While exemptions protect many of your basic assets, like your primary residence, much of your other personal property can be sold if it is non-exempt or exceeds California’s limits.

Emotional Toll

Filing for bankruptcy is public record, meaning that anyone can learn about your personal finance and debt situation. Moreover, your repayment plan, liquidation of assets and changes to your credit situation can affect your daily living. This can cause you to lose confidence, your sense of identity and self-esteem.

Debts Exempt From Bankruptcy

Not all debts can be discharged in bankruptcy. Some unsecured debts like federal student loans, alimony, tax debts and child support are exempt under bankruptcy law. For many individuals, student loan debt is their biggest burden.

A debt consolidation loan is one alternative to bankruptcy that can help individuals struggling under the weight of crippling debt. The experienced bankruptcy attorneys at Chang & Diamond are here to guide you.


Do You Need Help Filing Bankruptcy? Contact Chang & Diamond Today

If you are struggling to keep up with your payments, you may be asking yourself “can I file bankruptcy?” Filing for bankruptcy protection offers immediate relief and can help you on your journey to becoming debt free. However, it is important to understand the consequences of bankruptcy and how it can impact your life in the long- and short-term.

Before you rush for bankruptcy, call the attorneys at Chang & Diamond, APC. We offer personalized advice, helping you understand bankruptcy basics and alternative debt relief.

Schedule your free consultation here or call us.

Book a Free Consultation With Ease

Find out why we’re some of the best bankruptcy attorneys in San Diego