The person who recently asked this question on a forum devoted to personal finances said she had a lot of debt because she had been forced to close a business she had opened just a year ago. She had seen a bankruptcy attorney but didn’t like this as an option and was wondering about the ethics of just walking away (defaulting) from her debts.
The disadvantages of defaulting on debts
The thing about debts is that they are like a bad check – they just keep coming back to haunt you. You can “walk away” from debts but your creditors are not going to forgive you. One of your creditors could garnish your wages and get up to 25% of your paycheck. Even worse, it could sue you, get a judgment and then attach a lien to some of your assets such as your house. When it comes time to sell your house, that creditor would get its money off the top, leaving you with much less cash than you had anticipated. Having a judgment in your record will also screw up any financing you might apply for.
What a bankruptcy does to your credit
A chapter 7 bankruptcy typically takes about six months and can cost as little as $500. Once you complete it, most of your unsecured debts will be discharged. However, it can’t do anything about secured debts such as a mortgage or auto loans. It will not discharge student loan debts, child support or alimony, past-due taxes or any debts that you racked up as the result of fraud. Plus, if you have too much income you could be forced into a chapter 13 bankruptcy, which can be a very long and painful process.
Seven to 10 years
Another downside of having a bankruptcy is it will stay on your record for a long time. TransUnion typically keeps a bankruptcy in your credit file for 10 years as does Equifax. Experian usually keeps it in your file for just seven years.
It’s a public record
Even worse, bankruptcies are public records. This means if you have one, it will stay with you forever. You could apply for a job five years from now, your prospective employer could notice that you had a bankruptcy and decide not to hire you.
So what’s the answer
Unfortunately, this is a question for which there is no clear answer. For that matter, neither one of them is terribly ethical. In both cases, you would be stiffing your creditors. If you would rather not have a bankruptcy in your record, you could default on your loans and gamble that it would be many years before your creditors got around to suing you, which would give you time to get your finances in order and then pay off your debts. On the other hand, it you’re looking for a fast way to get out from under your debts and leave your creditors with no recourse, a bankruptcy might be your best alternative.