After nothing else has worked, sometimes filing bankruptcy is the only solution to a fresh start.
So you’ve tried debt consolidation, cutting your budget to the bone and just about every other money saving trick you can find but nothing seems to help. There seems nothing left to do and you just wish you could get a do-over.
Whenever you´re down and out the only way is up – isn’t just catchy lyrics but sometimes the only thing you’ve got to hold on. Times like these, you may be able to get that do-over by filing bankruptcy.
Should I consider filing bankruptcy?
A study by Ohio State’s Center for Human Resource Research found that about 13.5% of Americans have filed bankruptcy with over a million new cases every year. The process has been around since the 1800s and used as a way to keep people from being indentured servants to their debts. It helps individuals get relief from their debts so they can make a fresh financial start when their debts are more than their assets and there is no foreseeable way out.
Understand that a bankruptcy will absolutely destroy your credit. It may wipe clean much of your debts but you will have a tough time getting any kind of a loan for quite some time. It may even be difficult getting approved to rent a place after they’ve checked your credit report and found a bankruptcy. The same study above found that it took those who filed bankruptcy between 10 and 20 years to catch up to their peers in financial wealth.
The first thing you should do when considering filing bankruptcy is to talk to an attorney that specializes in bankruptcy. Unlike debt consolidation or other financial ideas, bankruptcy laws are technical and change from state to state. You’ll need a lawyer to help you file all the papers. The entire process may cost a couple of thousand dollars, including the filing fee and lawyer’s fees.
At the initial consultation, the attorney will determine if you are a good candidate to file bankruptcy. You will need to show all your debts, income and your current expenses. If you are able to file, you will be granted an automatic stay from your creditors until the bankruptcy hearing. This means your creditors won’t be able to call you anymore or hassle you for payment. Make absolutely sure you provide your attorney with all your debts. Anything forgotten and not included in your bankruptcy case will be collectible afterwards.
Your options in chapter 7 or chapter 13 bankruptcy
There are two types of bankruptcy for individuals, chapter 7 and chapter 13. The bankruptcy judge will ultimately be the one that decides which you can file but your lawyer should be able to tell you according to your debts and finances. Chapter 7 wipes out your debts, other than student loans and possibly your home mortgage if you want to keep your home. Eliminated debt can include credit cards, medical debt and other unsecured debt.
If it’s believed that you have the ability to repay some of your debt, you may have to file chapter 13 which is just a reorganization. The judge will decide how much you have to pay and you’ll be put on a payment schedule.
You will be able to keep your home and primary vehicle but will still need to pay any debt you have on them. Bankruptcy is meant as a way to allow people a path back on their feet, something that’s pretty hard to do if you’ve got no home or way to get to work. If you have very little equity in your home or the continuing mortgage payments mean you won’t be able to pay other bills, you might still want to consider including it in the bankruptcy.
Some states require you to go to a debt mediation class before you can file. Your lawyer will help you with a list of things you need to do before the filing. Whatever you do, do not start spending wildly thinking that you won’t have to repay any new bills. Running up your credit cards just before filing bankruptcy could force you into chapter 13 where you’ll have to repay some of the debt.
What happens after I file bankruptcy?
In most cases, only your student loan debt, mortgage, child support and any judgements as a result of criminal activity will be left after a bankruptcy. Some states allow for one spouse to file without the other, wiping clean a spouse’s debts but leaving the other’s credit report more or less intact. Any joint property like bank accounts will still need to be included in the bankruptcy filing.
A bankruptcy stays on your credit report for 7 to 10 years depending on how you file. Even if you are able to get credit, the interest rate is going to be extremely high for at least a few years.
Filing for bankruptcy may mean limited credit and some missed opportunities but it is not the end of the world. The first thing you need to do after filing is to step back and take a deep breath. Life is never a straight road but has many detours.
Grab copies of your credit reports to make sure everything has been discharged. All three of the credit rating agencies should have the bankruptcy listed on your report. You should have worked through a new budget during your bankruptcy. Keeping to this budget is your first step to rebuilding your credit and not falling back down the same path that led you to bankruptcy.
Use the bankruptcy as an opportunity. You are likely no longer burdened with hundreds of dollars in bills each month. Put as much of that money to savings and in an emergency fund. Make sure you pay all your remaining bills on time and your credit will slowly begin to rebuild, albeit after a few years.
Pay all remaining bills on time. Any negative reports are reflected for seven years on your credit score, so missing a payment or two here and there can seriously hurt your score. Keep in mind that 35% of your credit score is payment history, so paying bills on-time and in-full will quickly rebuild your credit.
Get a secured credit card when you can to start rebuilding your credit. These are basically just cards on which you deposit cash but use like a credit card at the store. The spending is reported to the credit bureaus so can be a way to show a good payment history.
Finally, make sure you have the support system you need to stay on track. The National Foundation for Credit Counseling offers free or low cost help if you´re trying to rebuild your finances. There may be community groups of others that have filed bankruptcy where you can share your story and get advice. It might take a while to get used to your new financial reality but you’ll get there. The Frugal Grandma
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.