People often worry about how risky it may be to file for bankruptcy. Fortunately, every bankruptcy attorney in America will tell you that the risks are low as long as you're not engaged in willful fraud. Still, it's a good idea to understand what you might be up against. A bankruptcy lawyer will tell their clients to be aware of the following four potential risks.
This is by far the worst risk in terms of consequences, even though the probability of a fraud allegation is close to zero as long as a petitioner plays it straight. All you have to do is accurately fill out the needed paperwork and list all of your assets and liabilities. Make a good-faith effort at every stage to answer the court's questions, too.
Don't try to wiggle out of debts by abusing the system. Your creditors also have rights. Bear in mind a creditor can question you under oath. It's wise to retain the services of a bankruptcy lawyer in anticipation of this possibility, even if you're sure you're on the straight and narrow path.
An outright rejection of bankruptcy may be problematic. In many cases, folks end up petitioning for a different type of bankruptcy. For example, a rejected Chapter 13 petition might lead to a Chapter 7 filing. However, this will lead to more fees.
Likewise, the court may reject specific elements of your bankruptcy. Someone filing for Chapter 13 may have their plan rejected, and the court might substitute its judgment. Folks filing for Chapter 7 also frequently see a few requested exemptions rejected.
Initially, your credit score will take a hit due to the bankruptcy case. This is to be expected, but it's unlikely to be permanent damage. Depending on the type of bankruptcy, it might stay on your record for either 7 or 10 years. According to one estimate, your creditor score will also likely take a hit of about 200 points.
Notably, the long-term benefits will probably outweigh the initial damage. Once you get your post-bankruptcy finances under control, there's a good chance you can resume building your credit.
Loss of Non-Essential Assets
Chapter 7 petitioners must liquidate their non-essential assets to pay part of what they owe. Some states allow wild card exemptions, which means you can protect some of these assets up to a certain value. Also, the court-appointed trustee may decide it will be too hard to sell certain assets.
For more information on the risks of filing for bankruptcy, talk to a bankruptcy attorney today.