Is Filing Bankruptcy Bad? Can It Be Good?

You’ll hear a lot of people conclusively say: “bankruptcy is bad.”

But why?

Why is the general consensus that filing for bankruptcy is a bad thing? While it is true that filing for bankruptcy is evidence of trouble with personal finances, that’s not the whole story.

A large part of the reason why people say bankruptcy is bad is because they don’t understand the process. No two bankruptcy cases are alike and consumers are forced into bankruptcy for a whole host of different reasons, most of which are beyond their control.

The country currently finds itself staring a recession in the face because of an unforeseen global pandemic called the coronavirus, or COVID-19. Most people who suffer financially because of this virus do so because of bad luck, not necessarily because of poor planning.

Below, we’ll go over some of the reasons people file for bankruptcy and how bankruptcy can sometimes be a good thing — if it’s right for you and your family.

Unforeseen life events can cause bankruptcy

If you can afford to pay off debt and file for bankruptcy instead, perhaps you’ve made a poor decision. Similarly, someone filing for bankruptcy with bad intentions or to defraud creditors is behaving poorly and cheating the system.

In a case like this, the peanut gallery would be correct: This type of bankruptcy is bad. But what about the family forced into bankruptcy after the breadwinner loses a job? What about the family who incurs enormous medical bills based on an unforeseen car accident? What about the ex-wife in a community property state who is left holding the bag on thousands of dollars of credit card bills charged by her ex-husband without her knowledge?

In these cases, bankruptcy can provide tremendous relief and an opportunity to start over. It’s easy for someone who hasn’t experienced hardship to say that bankruptcy is bad, but talk is cheap and people have families to take care of.

Why the bad reputation?

Filing for bankruptcy has a bad reputation in many circles due to the fact that it damages your credit and involves discharging debts that will likely never be repaid. Sure, Chapter 7 bankruptcy isn’t great for your credit score and will appear as a public record for 10 years after filing. However, most consumers who file for bankruptcy have already had their credit damaged by a series of late payments.

Whether your bankruptcy filing can be labeled as “bad” is really a function of whether you intend to defraud the system or whether you have a moral obligation to pay debts that you plan to discharge in bankruptcy. There are many types of debts that are eliminated by filing for bankruptcy. For example, perhaps your primary debts are a $50,000 credit card balance and a $10,000 personal loan that you owe to your brother that he loaned to you while he was having financial problems of his own. If you file for bankruptcy, both the credit card debt as well as the debt to your brother will be eliminated. Filing bankruptcy to discharge credit card debt at 29% interest would not be considered “bad” by most people.

On the other hand, some would argue that discharging a $10,000 debt to your brother might not be the right thing to do. Even if you fall into this camp, it is important to understand that there is nothing that prevents you from voluntarily paying back the debt after filing for bankruptcy. You could file bankruptcy, discharge your credit card debt and then once you have an opportunity to rebuild, write your brother a check for what you owe. This does not in any way violate the bankruptcy laws. For this reason, whether bankruptcy can be construed as bad is really a function of context.

When is bankruptcy a good idea? The answer depends on your situation

Bankruptcy is not inherently bad or good, but it is an important protection for honest consumers who find themselves in big trouble with debt. A small minority of filers try to abuse the bankruptcy process to hide assets and cheat creditors. These stories are dwarfed by the stories of honest people who have suffered through tough times and finally turned to bankruptcy because they can’t see a way out. Even the Bible calls for debt forgiveness every 8 years.