Considering bankruptcy is a huge step for most people. It can be a real blow to your self esteem, it can make you feel like a failure, it can ruin your credit and your ability to borrow. For most people, filing for personal bankruptcy is a last resort, so by the time you realize that bankruptcy is your only option, it makes you feel that you’ve failed at everything else and are left with no other choice. The fact is though that you nearly always have alternatives to bankruptcy, but also that bankruptcy may be necessary for you to survive and move on financially. Taking that step means you’re willing to pick up the pieces and move on with your life. It is a difficult decision no matter what you choose.

After you decide to file, the bad effects of bankruptcy can be felt for years to come. Unlike unpaid debts, which are on your credit report for seven years, a bankruptcy filing stays on your credit report for ten years. It tells creditors that rather than work your way through and effort to repay your debts, you walked away leaving the creditors holding the bag. What it doesn’t say is that you may have been given no other choice, but we’ll come to that in a minute. Creditors and lenders will see this bankruptcy on your record like a big red flag, which especially in today’s financial environment, leads many to avoid taking the risk that you’ve learned your lesson. This is the problem with bankruptcy, that even if you get a fresh start and have changed your ways years later, a lender may still deny you credit because of a bad situation you found yourself in years ago.

It’s important to remember that the vast majority of people would not willingly choose bankruptcy, but get put there by a negative event in their life that is out of their own control. There are three main reasons people wind up going bankrupt. The first is that an individual has a serious medical emergency and can’t pay the enormous bills (which by they way does not happen in other countries where they have health insurance!). Second is that the breadwinner for the household loses their job, is unable to find another or one that pays as well, and no longer has the income they once enjoyed. The third is divorce, where the household splits up and there is not enough income to support two households where there once was one. In fact, marital separations are way down as individuals realize they can’t afford to split up.

Given that any of these situations may or may not be under your control, the effects of bankruptcy may not be all bad. While your credit may be terrible for years to come, at the same time, you no longer have collectors calling you, you no longer lose sleep at night wondering where the tens of thousands or hundreds of thousands of dollars will come from to pay the hospitals. You won’t have to fear leaving your children in twenty four hour day care while you work three jobs just to make the same income you earned before you got laid off. For many people, there is a peace of mind that is a huge effect of bankruptcy, and one that can’t be ignored.

In fact, when you worry about the stigma of declaring bankruptcy, consider that the law was put in place for a reason. bankruptcy was enacted precisely because as a society, we recognize that there are situations where an individual is simply unable to pay crippling debt. Thankfully, we don’t send people to debtor’s prison any longer – that was abolished as cruel an unusual punishment, a holdover from the Dickensian era. Instead, we allow people a fresh start, and an ability to live a decent life instead of under the crushing weight of debt.

Today, the bankruptcy laws have been modified to give debtors a way to pay some of their debt back. For example, if you have a mortgage, you can work out a repayment plan under bankruptcy, where without filing for bankruptcy the bank may just have foreclosed and kicked you out. While today some banks work with their customers to help them pay underwater mortgages, the banks that refuse may be giving homeowners no other option but to file to save their home. You can also work out payment plans to keep a vehicle or other items that are financed. You will also have to pay a portion of unsecured debt, if you can afford it. This is the process of Chapter 11 bankruptcy, and you must have steady, regular income to have your case filed under this Chapter. For those without income or with insufficient income, filing Chapter 7 bankruptcy will let you discharge your debts, and never owe them again. It also means however that you may be forced to sell your home or car because there is no income to make payments under a repayment plan.

As you can see, there can be many bad effects of facing bankruptcy, but also some good can result. For each individual, you will need to determine if there is any way at all to pay down some of your debt, by working with lenders, ignoring them if you just have no money and the debt is unsecured, or even letting your personal items be repossessed if it means you can get rid of the payment obligation. Talk with a credit counselor before you make any decision to file for bankruptcy, and determine whether the long term effects are worth it for peace of mind today.