Bankruptcy shields you from debt collectors, but comes with serious consequences that must be weighed
The editorial content below is based solely on the objective assessment of our writers and is not driven by advertising dollars. However, we may receive compensation when you click on links to products from our partners. Learn more about our advertising policy.
The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Please see the bank’s website for the most current version of card offers; and please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs.
Court judgements for debt: after the gavel
Having a judgment for debt filed against you is frightening, but not the final word. Consumers have choices when dealing with a court judgment.
Among the choices for dealing with a debt judgment, declaring bankruptcy is the nuclear option.
Bankruptcy is a powerful weapon for wiping out debt, but comes with serious consequences for the debtor who pushes the button.
On the plus side, filing for bankruptcy halts collection action. A Chapter 7 proceeding generally wipes out unsecured debts, including debt judgments, while selling off your property that is not protected under state and federal exemptions. Under a Chapter 13 proceeding, debtors enter a repayment plan to wipe out a portion of their debts over three to five years.
“Having assets and income to protect are an important hallmark of a need to file bankruptcy,” said Robert Lawless, law professor at the University of Illinois and member of the National Bankruptcy Conference. The average Chapter 7 consumer bankruptcy case filed in 2012 had nearly $116,000 in total assets and median monthly income of $2,764, according to the Office of U.S. Courts. For the ins and outs of consumer bankruptcies, check the U.S. Bankruptcy Court’s “Bankruptcy Basics.”
Costs for legal fees are typically around $1,500 or more, limiting the bankruptcy option. A study by the National Bureau of Economic Research found that the most cash-strapped consumers lack the funds to file bankruptcy. Other drawbacks include restrictions on filing bankruptcy again — such as an eight-year wait for filing another Chapter 7 case — and a 10-year demerit on your credit report.
For those reasons, bankruptcy may be more useful as a bargaining tool in settlement talks than as a plan of action. “If you pay back 10 cents on the dollar, that’s still more than debt buyers are paying for the debt,” said Rex Anderson, a consumer lawyer in Michigan.
Main story: Court judgments for debt: after the gavel