Why You Shouldn't File for Bankruptcy

One day, someone should prepare a compilation of the "greatest hits" from our Fool Community of discussion boards. There are a heck of a lot of terrific posts out there, full of great advice, interesting thoughts, and charming personalities. Here's one classic post that was recommended by more than 200 readers and that received more than 40 responses.

CPAScott wrote the post. He offered eight detailed reasons why you shouldn't file for bankruptcy. I'll recap them below, but click in to our boards to read the whole post (which includes more info and a section on resources) and its responses.

CPAScott said, and I'm editing this for length a bit:

Even if there really is no hope, bankruptcy is a last choice -- always. In an effort to demonstrate to those of you who may be considering a bankruptcy filing, I've compiled a list of reasons why you don't want to. Yes, the list is meant to scare you a little, but worry not -- once you understand why, unless absolutely necessary, you shouldn't file for bankruptcy, I'll then offer a number of ways you might be able to improve your situation without the aid of the courts. Whether you can see it or not, there IS a light at the end of the tunnel -- and yes, you can get there!

  • Bankruptcy will ruin your credit for a minimum of 10 years. Filing for bankruptcy will release you from many of your debt obligations such as credit cards. Your inability to pay is reflected on your credit report and will remain there for a minimum of seven years. A bankruptcy filing is also one of the most damaging elements to your FICO score (the numerical assessment of your creditworthiness). With such a mark on your report, you will have extreme difficulty securing credit of any kind (including credit cards, automobile loans, and mortgages), and, even if you do, the interest rates will be exorbitant (think 24%). Even once the bankruptcy has cleared from your credit report, it may take much longer to repair your FICO score. Further, many credit applications ask whether you have filed for bankruptcy -- not just in the last seven to 10 years, but EVER.

  • You will lose some of your possessions.... [potentially including] cash; bank accounts; stocks, bonds, and other investments; a second car or truck; your primary car or truck if over a certain value; second or vacation homes; stamp, coin, and other collections; and family heirlooms. ...

  • You will lose your credit cards. ... If your car breaks down, or some other unforeseen event occurs, you might find it difficult -- or impossible -- to be able to produce the cash necessary to deal with it ... spare cash will be sparse.

  • You cannot file for bankruptcy again for [several] years. But, hey, why would you need to, right? Imagine this scenario: You file for bankruptcy to help ease your financial burdens. Three months later you are involved in a traffic accident that is deemed to be your fault. The driver of the other vehicle is seriously injured. He sues you for millions of dollars, and a judgment is entered against you. You have given up your only method of protection.

  • Not all obligations are discharged in bankruptcy. Student loans, income taxes less than three years due, and back alimony or child support are the most significant items that are non-dischargeable. [He listed some other non-discharged obligations as well.]

  • You will become part of the public record. Bankruptcy proceedings are public record, and your name and certain details about you will be recorded in the court documents. Your filing will also likely be reported in the "Legal Notices" section of your local newspaper.

  • Bankruptcy is the admission of defeat. Although there are some situations that could happen TO you that could drive you into bankruptcy, the overwhelming majority of personal bankruptcies are caused by the individual's own actions. You agreed to the debts that you are now buried behind, and filing bankruptcy is saying you can't manage your own life -- that your promise (in this case a promise to pay) is no good. It's a personal defeat.

  • Bankruptcy affects more than just you. When your debts are discharged in bankruptcy, the people and companies you owe are forced to write off the debt as uncollectible. Rather than you paying what you owe, they end up eating the loss. ... Why contribute to the disintegration of the nation's financial state unless absolutely necessary?

CPAScott then went on to offer eight ways to avoid bankruptcy. His post was written in 2003, and bankruptcy rules have since been changed to make it harder for most people to declare bankruptcy. So even if you want to file, you may not be able to. The new rules, on the other hand, likely received high-fives from card-issuing companies such as American Express (NYSE: AXP  ) , Capital One (NYSE: COF  ) , JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) .

Read the whole discussion, and you'll learn much more. Here are a few more articles of possible interest on the topic -- they address, among other things, the new bankruptcy laws.

Bank of America and JPMorgan Chase areMotley Fool Income Investorrecommendations. For more dividend-paying stocks, try out Income Investor free for 30 days.

LongtimeFoolcontributorSelena Maranjiandoes not own shares of any companies mentioned in this article.


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