Wednesday, August 31, 2011

Advantages and Disadvantages of Filing Bankruptcy -- Disadvantage: Part 5

This is part 5 of the 5 part series on disadvantages of filing bankruptcy, which is following a 5 part series on the advantages of filing.

Failure To Provide Ultimate Relief. Some people file bankruptcy thinking that it is the ultimate relief, and then everyone lives happily ever after. This is not always the case. Many people end up filing bankruptcy again at some point. 

So, what does bankruptcy not provide? First, if the major source of the underlying problem is not addressed, then bankruptcy may be of little benefit. This could be in the form of needing to discharge debts that are simply not dischargeable. For example, if a debtor was in an accident, found at fault, found guilty of DUI, and restitution is owed, the restitution may not be dischargeable, and if this is a major source of the debtor's financial troubles, bankruptcy may not help.

Another underlying problem could be spending habits. The filing of a bankruptcy does not necessarily change spending habits, thereby placing a debtor in a position of getting into financial trouble again. The current bankruptcy code, which underwent its latest major revision in 2005, attempts to resolve this problem by requiring debtors to participate in a personal financial management class prior to receiving a discharge. It is still too early to evaluate whether or not these classes have resulted in any significant positive impact.

Some debtor also seek relief, not realizing they may have non-exempt valuable assets. That is to say, generally, the bankruptcy code does not provide for a debtor keeping non-exempt assets, while discharging their debts. Debtors filing a pro se Chapter 7 bankruptcy are often surprised when they find out some of their assets have become property of their bankruptcy estate, and the trustee plan to liquidate the assets for the benefit of creditors. Therefore, if the relief sought was to keep assets while discharging debts, such a debtor will not realize the relief he or she sought.

It is important that prior to filing bankruptcy, to realize the bankruptcy process, with the code, rules, and case law can be complex. People filing without a firm understanding of the legalities of filing bankruptcy, or without the use of a competent local bankruptcy attorney, could easily run into unexpected consequences.

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