What are the pros and cons of bankruptcy?

What are the pros and cons of bankruptcy?

The pros and cons of filing Chapter 7 bankruptcy

COVID-19 has ravaged the economy, leaving us with unemployment rates not seen since the Great Depression. Stimulus packages and unemployment checks have been slow to arrive, and when they do come, they’re really only a Band-Aid for a financial wound that requires a tourniquet. It’s leaving many considering a step otherwise unimaginable to them: bankruptcy. Such a drastic step, however, comes with equally considerable pros and cons. 

Why a Chapter 7 bankruptcy?

Chapter 7 bankruptcy is designed for people facing insurmountable debt and limited income. It absolves you of most types of unsecured debt (a loan given without collateral. While a Chapter 7 bankruptcy can bring some immediate relief, it also comes with long-lasting repercussions. It’s best to understand the pros and cons before making any decisions.

What are the advantages of filing bankruptcy?

There’s a good reason you often hear the word relief associated with bankruptcy. That’s because relief encapsulates the benefits of filing for bankruptcy.

  • Provides immediate relief — You receive an automatic stay when you file for Chapter 7. That means the bankruptcy court will immediately issue a document to all your creditors notifying them of your bankruptcy and prohibiting them from further collection efforts.
  • Cleans away the most common types of debt — A Chapter 7 bankruptcy clears debts attributed to credit cards, utility bills and medical expenses. 
  • Halts wage garnishment — The automatic stay extends to wage garnishments. When you file for Chapter 7, creditors must cease wage garnishments.
  • Blocks an eviction or home foreclosure — The automatic stay granted when you file for bankruptcy can stop an eviction and postpone a foreclosure sale until the bankruptcy is finalized. That gives you more time to work out a payment plan or find another place to live if you don’t qualify for a homestead exemption (more on that below).
  • Prevents utility companies from suspending services.
  • Stops repossession of your car. 
  • May upgrade your credit score — If your score is below 600, bankruptcy can wipe away much of the debt that is lowering your score.
  • Occurs quickly—Most Chapter 7 bankruptcies take only 3-6 months to complete.

What is the downside of filing for bankruptcy?

  • Overlooks some debt — Bankruptcy will not free you from student loans, tax obligations from the past three years or maintenance and child support payments.
  • Stays on your credit report for up to 10 years.
  • Decimates your credit score — If you have a good credit score, brace yourself. It’s likely to plunge around 200 points. 
  • Eliminates financial privacy — When you file bankruptcy, the court will notify everyone you owe. Additionally, your case will be on public record.
  • Leaves co-signers to pay — Your bankruptcy will pass your financial pain along to the people who trusted you enough to co-sign on your loans.  
  • Cancels your credit cards — This one simply stands to reason: you will lose all your credit cards when you file bankruptcy. While you’ll be able to get new lines of credit within one to three years of filing, that credit will be a lot more expensive as it will carry a much higher interest rate.
  • Complicates getting a mortgage — If you don’t already have a mortgage, getting one in the first years after bankruptcy will be much more difficult.
  • Strips you of expensive property—That diamond broach that’s been handed down for generations? The lovingly-restored 1965 convertible Mustang you save for summer weekends? You can expect those to be sold to pay your creditors. 

What property is exempt from bankruptcy?

As just referenced, you are allowed to keep some property when filing for Chapter 7. In Wisconsin, bankruptcy filers are allowed to choose between Wisconsin or Federal exemptions, but they’re very closely aligned. Federal exemptions are updated on April 1 every three years to reflect the current consumer price index. The figures below were last updated on April 1, 2019. Each represents the limit for one individual. If you file jointly with a spouse, the limits double. 


Federal Limits

Wisconsin Limits

Homestead equity



1 motor vehicle





75% of net or 30 times the state or federal minimum wage (whichever is greater)

Saving and checking account



Animals, crops, clothing, appliances and furnishings, books, household goods and musical instruments

$625 per item ($13,400 total)

$12,000 (includes jewelry)



Included in personal property limit

Personal injury, except for pain and suffering or financial loss



Health aids, wrongful death recovery for a person you depended on and lost earnings

No limit

No limit

Tax-exempt retirement accounts

No limit

No limit



Retirement accounts

Public benefits

No limit

No limit

Tools of trade



Maintenance and child support

No limit

No limit

Life insurance policy

$13,400 loan value

$4,000 in accrued dividends

Wildcard (to apply to whatever property you choose)




Consult a bankruptcy attorney

Filing for bankruptcy is a big decision. While most people never want to take that road, it is there as a safety net for life’s unexpected turns, like, perhaps, a global pandemic. If you’re considering filing for bankruptcy protection, call us for a free consultation. 



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