If you’re struggling to pay debt, you’re likely considering filing for bankruptcy—and with good reason. Declaring bankruptcy will:

• stop creditors from collecting against you
• wipe out debt
• give you time to catch up on payments, and
• help you keep your home or car.

But bankruptcy’s benefits come at a cost. Be sure to consider some important consequences, as well as the advantages, by reviewing the pros and cons below.

Advantages of Filing for Bankruptcy

Filing for bankruptcy offers solutions to debtors in financial distress. For instance, bankruptcy can:

Stop most creditors in their tracks.

• Once you file, collection calls must cease. The same holds true for many lawsuits, wage garnishments, foreclosures, and repossessions because the court puts an automatic stay in place that prohibits creditors from pursuing you. The stay won’t stop all creditor actions, though. You’ll still pay support payments, and some lawsuits will continue, such as criminal cases. The stay might not apply if you’ve filed multiple bankruptcy cases, too.

Get rid of many types of debt.

• You’ll erase credit card debt, personal loans, medical bills, utility debt, and many other balances. If you secured a debt with collateral, such as a house or car, you can wipe out the debt, but you’ll have to give up the property.

Help you keep your house or car.

• If you’re behind on your mortgage or car payment, and you don’t want to lose the property, filing for bankruptcy will stop a foreclosure or repossession. Chapter 7 won’t help you catch up on your payment so the stay will likely be temporary. If you want a permanent fix, Chapter 13 provides a way to catch up on late payments so you can keep a house, car, or other property you’ve put up as collateral.

Stop a pending eviction.

• If you’re being evicted, a bankruptcy filing can buy you more time. It will stop an eviction that’s still in the litigation process. But the stay will likely be temporary, so it probably wouldn’t be warranted unless you’d benefit from wiping out debt. In most states, filing for bankruptcy won’t help if your landlord already has an eviction judgment against you. (Learn more about bankruptcy and evictions.)

Keep property needed to work and live.

• You don’t give up everything when you file for bankruptcy. Every filer can protect certain property using state exemptions, such as a modest car, furniture, clothing, some equity in your home, and your retirement account.

Get rid of debt for far less than you owe.

• The cost to file for bankruptcy is quite low in contrast to the amount of debt most people can discharge. Find out the cost of filing for Chapter 7 and how much you’ll pay for Chapter 13.

Disadvantages of Filing for Bankruptcy

Filing for bankruptcy comes with pitfalls, too. Here are some common consequences that you’ll want to consider.

Bankruptcy will affect your credit score

• A filing will remain on your credit report for seven to ten years. But the impact on your ability to get new credit might not be that bad. Getting rid of debt can offset the negative mark of the bankruptcy, and you’ll likely get new credit offers soon. Plus, the effect of having a bankruptcy lessens over time.

You could have a hard time renting an apartment.

• It’s a good idea to have a stable place to live before filing. Many management companies won’t work with you if you’ve filed within the last year or two.

Opening a bank account might be difficult.

• Most banks won’t close your account when you file for bankruptcy if it’s in good standing. But many won’t open a new account after your bankruptcy.

Not all debt will go away.

• You’ll remain responsible for nondischargeable debt, such as recent tax debt, support obligations, student loans, and more. Older tax debt can be discharged, as can student loans when you show paying them would cause undue hardship.

You can’t keep collateral you can’t pay for.

• Any property you used to guarantee a loan will go back to the creditor if you can’t arrange to catch up on or renegotiate the payment. That includes more than just your house, car, or business equipment, but extends to anything you bought on a secured credit card from jewelry, furniture, or electronics stores.

You can’t stop an eviction if the landlord has a possession order (in most states).

• If a judge already found in favor of the landlord and issued an order giving the landlord the right to possession of the property, bankruptcy likely won’t help. An exception exists if you live in a state that allows you to catch up on your rent after an eviction (there are only a few).

Applying for the Bankruptcy Chapter That Meets Your Needs

Whether you’ll be better off using Chapter 7 or 13 will depend on your qualifications and needs.

• Chapter 7 bankruptcy. Intended for low-income filers, Chapter 7 will wipe out qualifying debt in three to four months. You’ll qualify by passing the Chapter 7 means test. Although you can protect some property, you’ll have to give up nonexempt property (property you can’t protect with an exemption). This chapter won’t help you keep a house or car when you’re behind on payments.
• Chapter 13 bankruptcy. This chapter works well for high-income filers who don’t qualify for Chapter 7. Chapter 13 is also good for those who don’t want to give up property in Chapter 7 or who want to catch up on a mortgage or car payment. In your repayment plan, you’ll pay your creditors your disposable income or the value of your nonexempt property, whichever is more.

Specific Advantages of Chapter 13 Bankruptcy

Even though most people prefer Chapter 7, Chapter 13 bankruptcy has unique benefits. For instance, you can:

• pay off nondischargeable debt, such as support obligations and past due taxes, over three to five years
• reduce or “cram down” the amount you owe on an asset to the value of the property (you can’t use this for your residence), or
• eliminate a junior mortgage when your house is underwater.

Is Filing for Bankruptcy Worth It?

For many people, the answer is yes. But because each situation is unique, there’s no one answer to the question. Here’s a system you can use to help you decide.

1. Determine your goal. Do you want to get rid of debt? Keep important property? Stay in a home?
2. Learn about bankruptcy’s benefits and consequences. See the advantages and disadvantages of filing above. You can also read To File for Bankruptcy or Not: Factors to Consider.
3. Decide whether you should file. If you can achieve your goal, come out ahead financially, and weather the hit to your credit score, it’s likely a good move.

Keep in mind that other factors could come into play when deciding to file for bankruptcy.

The simplest way to determine when to declare bankruptcy is by meeting with a local bankruptcy attorney who can review your matter and provide individualized advice.