Personal Bankruptcy: Advantages & Disadvantages

The advantages of personal bankruptcy


For many debtors, debt is growing too fast. They cannot offer their creditors any further payments – because the income is not enough even with a reduced installment after a settlement. In this case, consumer bankruptcy proceedings are a way out due to the discharge of residual debt. You will safely lose your debt regardless of the repayment to creditors or the amount of debt.


With personal bankruptcy, the time of debt discharge can be planned in advance. In contrast to a settlement, which depends on a failure-free installment, the remaining debt is released after 3 years in proceedings from October 1st, 2020, after 6 years at the latest in old proceedings (Section 300 (1) InsO). In the event of a voluntary repayment of part of the debt in private insolvency proceedings, the remaining debt is released after 3 or 5 years, even in old proceedings.


The predictability of the debt relief leads to a psychological relief: The often long-term pressure to perform due to constant repayment attempts as well as the burden of seizures and enforcements decrease. Immediately after the opening of consumer insolvency proceedings, the creditors are no longer allowed to enforce against you – the so-called seizure protection applies. You have no obligation to repay.


Personal bankruptcy brings a financial advantage. This has been shown by the many years of experience from our debt counseling practice. Many debtors pay more money to creditors before bankruptcy – or during a settlement – than they would in a personal bankruptcy. The private insolvency proceedings often lead to a higher available income due to the statutory seizure protection amounts. The insolvency administrator prevents any enforcement or attachment by a creditor. The subsistence level is protected by the seizure exemption limit.


The private insolvency proceedings lead to seizure protection: From the opening, your creditors may no longer enforce against you, for example by appointing a bailiff, forcing you to submit an affidavit or garnishing your salary or account.


“Bad letters” from your creditors stop quickly: usually with the first letter from us and at the latest when private bankruptcy proceedings are opened. You no longer have to communicate with your creditors – we write to all creditors and appoint ourselves as a law firm as authorized representative. From this point on, most of the believers turn to us.


Your lifestyle is not significantly restricted. You have free access to the non-attachable part of your income and you do not have to ask anyone if, for example, you want to move, change jobs, quit or get married. In addition, if properly prepared by an experienced specialist law firm, the insolvency administrator will only contact you about 5 times by letter during the conduct of business period of private bankruptcy.


The residual debt discharge of a personal bankruptcy frees you from all debts – no matter where they come from, how high they are or how many creditors you have. The scope of the residual debt discharge is very wide. You will be released from all debts that existed before personal bankruptcy. It does not matter whether the debts exist with private individuals, companies, banks, institutions such as health insurance companies or authorities such as the tax office.

It also waives debts to creditors that you forgot or cannot locate. If a forgotten creditor turns up in the bankruptcy proceedings or after their conclusion, although we have made all the required research attempts. You will also be exempted from these claims. You should go through chapter 7 bankruptcy here.

The same applies to claims that have not yet been finalized, such as real estate financing for a house that has not yet been auctioned or a student loan that is not yet due.

For these reasons, personal bankruptcy is also known as a “haircut” – you are freed from as many types of debt as possible.

The disadvantages of personal bankruptcy


The insolvency administrator will seize the attachable assets and income. The non-attachable assets and income such as the entire household, a car required for a work trip, etc. are of course left.

Alternative: On the surface, the out-of-court settlement is an alternative. There is no opening resolution – the debtor’s attachable assets are not seized for bankruptcy. In fact, more is always offered in a settlement than in insolvency proceedings – this better position is a prerequisite for an agreement. Financially, the comparison does not make a debtor any better. If there is no possibility of a settlement payment, it is not recommended. Personal bankruptcy is then the better alternative, despite the bankruptcy charge.


The private bankruptcy lasts 3 years for proceedings from October 1st, 2020. The old procedures last 3, 5 or 6 years depending on the repayment rate.

Alternatives:  An out-of-court settlement with a one-off payment leads to freedom from debt more quickly: on average, the settlement period is only three months. With a bankruptcy plan, you can usually achieve a more cost-effective and more secure debt relief in the medium term within one year (“one-year personal bankruptcy”). Note, however, that a debt settlement or an installment plan will not result in faster debt relief – personal bankruptcy is the best alternative.


Some debtors cannot agree that the debts will simply be “canceled” after a personal bankruptcy. At no time did they intend to leave creditors empty-handed.

Alternatives:  If this interest is in the foreground and there is financial possibility, an attempt can be made to repay in full. This is usually practically impossible from your own income – it is usually not enough to bear the ever-increasing interest. A third party loan is conceivable – from relatives or banks specializing in debt rescheduling. We advise against this, however, because from experience, the debt is only shifted and the problem is not essentially resolved. A settlement or an insolvency plan is conceivable, in which a full repayment based on a very long installment is agreed. Another alternative is: There is no obstacle for the debtor to transfer an amount to the creditors – even without a reason for payment – after the personal bankruptcy has expired and the remaining debt has been released.


The opening of personal bankruptcy or the fact that the remaining debt is discharged are published in the so-called bankruptcy announcements.  This does not happen with a debt comparison. As a rule, there are no proceedings before a court and therefore no bankruptcy announcement takes place. However, it should be noted that in a comparison, due to the necessary suspension of payments, bankruptcy entries already exist, which unfortunately worsen the debtor’s scoring in a comparable way. There is therefore no real alternative.


A personal bankruptcy is over after 3, 5 or 6 years. It then takes 3 years until the bankruptcy is completely cleaned up.

Alternatives: Comparison with one-time payment will lead quickly to the credit bureau cleanup: average bankruptcy is cleaned up about 3.5 years after the start of settlement negotiations. With a bankruptcy plan, you can usually achieve a more cost-effective and more secure debt relief in the medium term within one year (“one-year personal bankruptcy”). The bankruptcy is settled by us approx. 4 years after the start of the insolvency plan. Please note, however, that a debt comparison or an insolvency plan on installments does not lead to a faster deletion of the bankruptcy entry – personal bankruptcy is then the best alternative.


This disadvantage should only affect a few, but for the sake of completeness it should be mentioned that a residence in the US is required for personal bankruptcy. However, this only applies until you have filed for personal bankruptcy. If bankruptcy is ongoing, you can also emigrate. Just keep in mind that you also have to meet your information and cooperation obligations abroad.

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