Whatever you think of bankruptcy, you might have a few of the details wrong. It's understandable. We don't tend to give it a lot of thought until the day it matters very much to us. Bankruptcy can be scary because we often don't know someone who's been through the process. Relying on friends for advice won't help, especially if we're too embarrassed to ask.
Here's a fact: bankruptcy is more common than you'd think. There's no reason to be ashamed. It's a financial tool that exists to help people. It's a serious decision, but it's not a personal failing.
Now that we have that myth out of the way, what else isn't true about bankruptcy?
- You might think that it's better to pay off debts than to file for bankruptcy, but that isn't true. If debts add up to more than 50 percent of your annual income, and you don't see a way of meeting them within five years, you should choose bankruptcy. You won't be able to dig yourself out of debt and will only get in deeper over the next few years.
- Sometimes we assume that filing for bankruptcy means giving up all of our worldly possessions. Nope, that's not what will happen. In Chapter 7, your basic assets will be preserved so that you can go on with your day-to-day activities. These are known as exemptions, and they vary from state to state. In Chapter 13 bankruptcy, you keep your belongings, and their value is calculated into the repayment plan.
- If you file, you won't owe anyone anything-wouldn't that be awesome? But it's not the truth. If you owe child support, student loans or taxes you will still be responsible for meeting those debts. You'll also be responsible for any money you owe because of fraudulent activity.
- Once you file, you'll never get a credit card, loan or mortgage again. Not true, although there will be a period that will not be easy. But your credit score is likely damaged already by long-term unpaid debt. You have a chance to repair it after a bankruptcy filing. You may have to use different financial products, like a secured credit card, but it is possible to rebuild your credit even while the bankruptcy is on your credit report for 7-10 years following the filing.
It might feel overwhelming right now, but filing for bankruptcy isn't the end of the road. It's more like the beginning of a new one. To discuss possible options for your situation, contact a bankruptcy attorney.