5 Questions to Ask Yourself Before Going Bankrupt

“Did you ever consider going bankrupt?”

I was asked this question the other day by a friend about whether my husband and I had ever considered filing for bankruptcy during our time spent in debt. The level of our debt at one time was on the extreme side after all.

The short answer is yes, we did consider bankruptcy. We were actually advised to go bankrupt by debt professionals at the time! But we carefully weighed up the pros and cons and decided that this wasn’t the route we should go down.

Bankruptcy is about as serious as debt gets. This is an option for people who can’t afford to pay their debts, now or in the future. It should only be seen as a last and final resort.

If you’re in a place where you’re thinking about going bankrupt, ask yourself these important questions first before making a decision to proceed. You might be thankful you did later!

1. Will filing for bankruptcy actually mean your debts are cleared?

Many people assume that going bankrupt means they’ll get the slate wiped clean and they can start afresh with their lives. In reality though, this isn’t always the case. Some debts can’t be included in bankruptcy. For example, in the UK, you won’t be able to include your student loans, any child support arrears and court fines.

In the US, you might be able to get your student loan cancelled but this isn’t guaranteed – and you won’t be able to include tax or child support debts. The side effects of going bankrupt are going to seem much worse, if you’ve still got debts that you need to deal with anyway (see question 5 later on in this post for more information on the side effects)!

2. Can you afford to go bankrupt?

Believe it or not, you’ll need to pay to go bankrupt, which is obviously a problem when you’re already struggling with debt and trying to find enough money to live on as well. But the fact is that filing for bankruptcy is a legal process which costs money. In England and Wales, the cost to go bankrupt is currently £705. In the US, it’s common practice to hire a lawyer to manage the bankruptcy process, in which case you can expect to pay around $1700 in legal fees.

3. Will your job be safe if you file for bankruptcy?

In the UK, there are some jobs you can’t do until your bankruptcy is over, such as working as a Company Director or an Insolvency Practitioner. If you work for a financial institution, your employer may be allowed to dismiss you if you go bankrupt (check your contract)!

In the US, luckily there are laws in place that mean you can’t be fired from your job if you file for bankruptcy. But you may find it hard to find a new job with a new employer. If you’re considering bankruptcy, take some time to think about your work options and whether you’ll be affected in this way.

4. Will you lose your home?

If you’re renting your home, as long as you’re keeping up with rental payments, your landlord shouldn’t be able to evict you. If you own your home or have a mortgage on it, you will be putting your home at risk if you file for bankruptcy.

This is a complicated area and it really depends on a number of things as to whether your home will need to be sold to pay off your debts. If you have equity in your home, then it’s within the power of the official receiver (or Trustee) to sell your home so they can use the equity to pay legal fees and your creditors.

If you don’t have equity or have negative equity, then your home may be safe. In the US, if you have home equity, you may be able to qualify for a homestead exemption (this varies by state) which may enable you to keep your home.

5. Can you cope with the side effects of bankruptcy?

Bankruptcy may seem like an easy option in some ways, but in others it’s definitely not. Firstly, you may have to close your bank account with your existing bank and it could be tricky finding another bank that will let you have an account.

Secondly, your credit rating will be severely affected by filing for bankruptcy and you won’t be able to get credit until you’re discharged. Your bankruptcy order will show on your credit file for a minimum of 6 years in the UK and up to 10 years in the US. Even when you’ve been discharged from bankruptcy, it will take time to rebuild your credit score again.

Finally, there is unfortunately a social stigma attached to going bankrupt. This might cause a problem if you worry about what other people will think of you, although you shouldn’t have to let too many people know about your bankruptcy, unless you want to. There is also an emotional stigma that is associated with bankruptcy, as some people feel bad about the situation they’ve found themselves in and struggle to cope afterwards.

Is bankruptcy right for you?

Bankruptcy is an option that may work for you, but at the same time, there are other options that may be better suited to your circumstances. Read up on Debt Management Plans, Debt Relief Orders and IVAs as alternative ways to help with your debt problem.

Because bankruptcy can be complicated and there are many ways going bankrupt can impact your life, it really should be seen as a last resort once all other options have been explored. Always seek advice from a professional debt advisor before making your decision.

Further reading:

The process of filing for bankruptcy is different in the UK to the US and other areas of the world. You may want to check out these links to further reading and professional advice on going bankrupt below:

• Stepchange – (UK readers)
• US Courts – (US readers)

*Please note that I’m not a professional debt advisor, the opinions in this article should not be taken as formal debt advice!

What are your thoughts about filing for bankruptcy?