Personal Bankruptcy Pros and Cons

Individuals who find themselves deep in debt might consider personal bankruptcy as an option to clearing their debt and getting back on the road to financial health. The beauty of this solution lies in the fact that declaring personal bankruptcy can absolve one of any debt that they carry and essentially lets them start over with a clean slate. This isn’t the only upside to declaring personal bankruptcy and there are a lot of downsides to it as well. Personal bankruptcy has many pros and cons and it’s important for anyone looking into it to understand it fully so that it can actually work for them instead of against them.

Writing off debt is the most obvious pro to declaring personal bankruptcy. After declaring bankruptcy, an individual is cleared of almost all of their debt. This includes unsecured personal loans and credit card debt, which is often what gets people into the most trouble financially. Writing off debts in personal bankruptcy is called being discharged from personal bankruptcy. This means that within twelve months, the individual who has filed for bankruptcy will be absolved of their debt. This is a much shorter period of time than other debt management programs such as an Individual Voluntary Arrangement.

Along with having personal debt erased from financial history, another pro of declaring personal bankruptcy is that all calls from collection agencies will stop. One reason for this is because personal bankruptcy does absolve the individual from any debt and so there’s no reason for collection agencies to continue calling. But even more than that, once personal bankruptcy is filed, it’s actually illegal for these agencies and other creditors to call.

These are all certainly very good reasons for any person in financial trouble to declare personal bankruptcy. So, why does the word ‘bankruptcy’ come with such negative connotations? The reason is because there are many cons that are associated with personal bankruptcy.

The first is that all finances relating to the individual will be heavily scrutinized by the Official Receiver (OR.) The OR is appointed by a court and responsible for investigating the person’s financial records and finding the exact reason for needing to declare bankruptcy. The OR then reports back to the court on their findings. Although any person with a legitimate need for personal bankruptcy has nothing to fear during this process, it can be quite time-consuming and inconvenient to have someone digging through their financial records.

This investigation of financial records could also lead to a Bankruptcy Restriction Order (BRO.) A BRO is issued when the OR discovers that the bankruptcy applicant has spent money recklessly in ways such as gambling. If the OR discovers that the debtor also borrowed money that they never had the means or the intention to pay back, this could also result in a BRO. Not only will a BRO result in the applicant being denied personal bankruptcy, it’s also considered an actual bankruptcy offence and the individual can be held accountable for up to 5 years should they be found guilty.

An individual who owns a home and wants to declare personal bankruptcy should also consider that they will in fact lose their home if they declare bankruptcy. This is because they need to show that they are willing to pay off as much of their debt as possible. And selling their home for the best price possible and distributing the profit to different creditors is the best and quickest way to do that. But a home isn’t the only thing that can be lost by declaring personal bankruptcy. Individuals in a professional field such as law, government office, or accountants will also lose their job should they declare bankruptcy.

Another major con of declaring personal bankruptcy is the one that most people think of when they consider declaring bankruptcy. This is the fact that declaring bankruptcy stays on a person’s credit report for many, many years and will affect further credit negatively. Seeing that a person has declared personal bankruptcy almost guarantees that other creditors will be wary of loaning the individual money or providing them with credit of any kind. In the United Kingdom, personal bankruptcy stays on a credit report for six years and in the United States, bankruptcy is a black mark on a credit report for ten years.

Another major con that needs to be taken into consideration before declaring personal bankruptcy is the fact that not all debts can be written off. Secured loans, child support, and student loans are just a few items that cannot be written off through personal bankruptcy. Because of this, it’s very important for anyone who’s considering bankruptcy to fully examine what type of debt they have and then determine whether or not personal bankruptcy will help them through it.


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