What is bankruptcy- According to a Supreme Court writing issued in 1934, the purpose of bankruptcy is to "[give] to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt". Essentially, bankruptcy was invented to give hopelessly indebted people a legal process by which they can be released from liability for their debts. Bankruptcy benefits society because it discourages predatory lending and helps circumvent the creation of a permanent destitute underclass.

Ch 7 bankruptcy is the type with which most people are familiar. There are "asset" Ch 7 bankruptcies, in which a person may be required to sell assets to pay all or a portion of their debt, and "no asset" Ch 7 bankruptcies, where a person has no assets to leverage. A person must pass a "means test" to determine eligibility in either type. If an individual is eligible for a Ch7 bankruptcy, they can "walk away" from their debts upon discharge.

Ch 11 bankruptcy is called a "re-organization" and is the only type available to an individual who does not pass the means test to qualify for Ch 7. In a Ch 11 bankruptcy, the debtor negotiates a payment plan with their creditors so that over 3-5 years, the filer can pay off their debts.

Consequences- Ch 7 bankruptcy remains on your credit report for 10 years, and Ch 11 remains for 7 years. Obviously, this will affect anything you try to do that requires a credit report. Also, the individuals granted bankruptcy is considered part of the public record, so anyone interested can find out you filed and were granted bankruptcy.

Why I’m not filing for bankruptcy

  • The shame of it being on my public record- The thought of a friend, in-laws, or co-workers being able to easily find evidence of my spending problem fills me with shame.
  • I don't own a home, and I'm scared of being unable to find a safe and clean rental if there's a bankruptcy on my record.
  • Bankruptcy feels like the ultimate failure and would prove I am just as bad as my family.
  • I would rather say I changed my habits, worked hard, and fixed my situation myself.
  • Bankruptcy would be another band-aid solution to a behavioral problem.
  • More risk than benefit- I likely only qualify for Ch 13, meaning I'll
    have to pay back all or most of my debt. I'm already on track to pay off my debt within 3-5 years, so why not do that without the 7-year credit blemish?
  • My credit score is easily recoverable-Despite my debt situation, I currently have a 100% on-time payment history, and the only problematic issue is my extremely high debt utilization ratio. As I pay that down, the utilization ratio issue will resolve. If I can repay the debt successfully, I should have a solid credit profile within the next five years. A 7-year bankruptcy mark would hinder my financial recovery.
  • Most importantly, The option will always be there, so why rush to do it now? If I haven't made significant progress on my debt within the next six months, perhaps I'll revisit it as an option.