Eliminator of Debt or Bad for Credit?
When faced with financial hardship, filing for bankruptcy may seem like throwing in the towel. Many people equate self-worth with net worth. So when faced with the decision on whether or not to file, your self-esteem may take as big a hit as the one to your finances. Rather than think of it as “giving up,” filing for bankruptcy may be a savvy move to eliminate some debt, get creditors off your back, and give you the time you need to “regroup” financially. That is why many refer to it as “bankruptcy protection.” Approach the decision on whether or not to file with as little emotion as possible. You’ll want to make a clear-headed choice as to whether bankruptcy protection is the right solution for you. And keep in mind that there are plenty of successful millionaires who have suffered two or three major financial setbacks on their way to eventual monetary success.
What Bankruptcy Can Do
Bankruptcy wipes out some debt, but not all of it. Different types of debt are treated differently whether you file for Chapter 7 or Chapter 13. You can eliminate credit card debt through both, but in cases of alimony, child support, student loans, tax debts and secured debts, Chapter 13 may help, whereas Chapter 7 may not. You also may have to pay back an allotment of unsecured debts.
Bankruptcy can help get creditors and collection agencies out of your hair, particularly if they have gotten belligerent and have made threats about repossessing your car or foreclosing on your house. It can also eliminate certain kinds of liens. Once a creditor is notified that you have filed for protection, it must stop all collection efforts. Have your case number handy in case of stray calls. Careful, though; a creditor may be able to take your property unless you follow the appropriate bankruptcy procedure.
What Bankruptcy Cannot Do
Bankruptcy will not wipe the slate clean when it comes to certain rights of secured creditors, i.e. an entity that has taken a mortgage or other lien on property such as a car or home as collateral for the loan. Secured creditors can be forced to take payments over time in the bankruptcy process, giving you a bit of a grace period. Bankruptcy can also eliminate your obligation to pay any additional money if your property is taken. Generally, though, you cannot keep the home or car unless you continue to pay the debt.
Other types of debts set aside by bankruptcy law for special treatment may not be able to be discharged. These may include child support, alimony, criminal fines, court restitution orders, some student loans and some taxes.
If a friend or relative has co-signed a loan and you discharge that loan in bankruptcy, the cosigner may have to repay all or part of the loan. If you are married, don’t think that filing by yourself will keep your spouse out of the fray. Your spouse is still liable for any joint debts. Filing jointly may double your exemptions. Get professional advise from an additional attorney as to whether to file solo or jointly.
A common misconception about bankruptcy is that you cannot own anything for a period of time after filing. However, get to keep all of your exempt property. Keep in mind, though, that if you receive a property settlement, life insurance or an inheritance within 180 days, that property or money may have to be handed over to your creditors if that money or property is not exempt.
As to whether filing for bankruptcy will destroy your credit, you could lose up to 200 points on your credit score once a bankruptcy report is filed. The good news is, you can bounce back within a few years provided you can prove stability to creditors, give a reasonable story as to why you filed, and stay current on what your credit report says, correcting any erroneous entries.
The Takeaway
Yes, there are advantages to filing for bankruptcy protection:
- The collection calls and letters stop.
- You have the chance to eliminate most, maybe even all of your debt.
- It gives you the breathing room to reorganize your financial life so that you are better equipped to repay what you owe over time.
- All of this puts you in a more advantageous position to get a fresh start.
Bankruptcy cannot cure every problem, nor is it the right solution for all individuals. As with every important life decision, there are advantages and disadvantages. Remember though, it is not always an indication that you have been unwilling or unable to manage your money. Unforeseen circumstances such as job loss, medical emergencies, divorce, or IRS problems are common reasons why responsible people file for bankruptcy every day. Talk to an attorney who can help you sort out the pros and cons before taking this step. Whichever decision you come to, you can rest assured that you have given it due consideration, coming to terms with what is most advantageous for you, your family and your financial future.
– The Litigation Team
Ethan | Mark