For many debtors, bankruptcy can be a way to get a "fresh start" in life without the burden of debt payments. However, there are serious and long-lasting consequences to bankruptcy. For starters, if you file bankruptcy it will appear on your credit report for up to 10 years, which may affect your ability to get a job or get any type of loan. Even with these negative effects, sometimes bankruptcy is a viable option.
If you are completely overwhelmed with debt to the point that you can make only minimum payments to your creditors, you may never climb out of the debt hole. If you put all of your disposable income toward debt service, you cannot save any money for retirement or future needs. Situations such as these may be appropriate ones in which to consider bankruptcy.
Illness and Loss of Income
Even if you don't have overwhelming debt, if you lose your source of income, you may be in a position where bankruptcy can help. If illness precludes you from going to work, you may not only incur large medical bills but also lose your job and your health insurance. A large number of Americans have to file bankruptcy due to medical expenses, often accompanied by job loss.
Lawsuits and Judgments
Defaulting on a loan to an unsecured creditor such as a credit card company will cause you to take a hit on your credit report but often will have no further issues for some time. Unlike a secured loan such as a car loan, in which your creditor has the right to repossess your property, unsecured lenders cannot take anything from you without getting court approval, which can be costly and time-consuming. Ultimately, however, creditors may file a lawsuit against you and obtain a judgment, which is a court order granting permission to your creditor to garnish your wages. Having a judgment lodged against you is one reason you might want to consider bankruptcy, as a bankruptcy discharge can nullify a judgment and protect your wages from garnishment.
Falling Behind on Payments
If you have fallen behind on your mortgage or car loan payments, bankruptcy may preserve your assets and give you a chance to catch up. Once you file a bankruptcy petition, your creditors are legally prevented from trying to collect payments from you through a legal notion known as the automatic stay. If you file a Chapter 13 bankruptcy, you can incorporate payments to your secured lenders, such as your home and car lenders, without additional fees and interest expenses accruing to your debt.