Bankruptcy is often seen as an easy way out, but that’s far from the truth. It is an option that will always be there for anyone who is struggling with debt, but it’s not always the best one. The public’s perception of bankruptcy has been skewed by celeb gossip and misinformation. We hear stories about celebrities going bankrupt but still living the life of luxury and we think that it’s a cop out, but there’s more to it than that.
If this is the opinion you have about bankruptcy then it’s time to learn some surprising truths:
7. There is More Than One Type
There are multiple types of bankruptcy, known as “chapters”. The most common of these are Chapter 7 and Chapter 13, which are explained in more detail here. These two types are filed by individuals and they differ in terms of what can be written off, and what processes need to be undertaken.
There are also types of bankruptcy that can be filed by businesses and government organizations.
6. The Slate is Wiped Clean, But Not How you Think
You don’t just file for bankruptcy and then automatically have your debts erased. It’s not that easy unfortunately, otherwise everyone would be doing it.
If you file for Chapter 7 then your assets will be liquidated and the money will then be used to pay back your creditors. There are some things that you will be allowed to keep, but these are the exceptions and for the most part you’ll lose everything.
If you file for Chapter 13 then a deal will be arranged that will allow you to keep more of your assets, but will force you to pay back your creditors over a fixed period of time. What’s more, creditors need to agree to these plans and if they do not then you may be required to pay in full on their terms.
5. Some Debts Remain
Chapter 7 is often seen as the definitive way to wipe the slate clean, but even that’s not true. There are some debts that will remain, including child support, student loans and taxes. If these debts make up a considerably portion of your total debt then your options are a little more limited.
As we have discussed many times before here on DebtReviews, student loan debt is huge in the United States. It’s a leading contributor to the growing problem of personal debt, and once you add taxes to the equation then you’re also including a glut of small business owners and families who are struggling to come to grips with massive tax bills.
4.It Will Kill Your Credit Score
Those celebrities that you see seemingly enjoying life and having everything their own way after bankruptcy are suffering more than you think. Imagine how much harder your life would be if your credit score was decimated, and you’ll have a good idea of how much they are struggling.
Because when you file for bankruptcy, your credit score will take a significant hit and that filing will remain on your score for 10 years. You can say goodbye to car loans, mortgages and new credit cards for a few years, and even if you clean things up and get a bit of money and credit, you will continue to struggle to get respect from creditors until that 10 year wait is over.
3. It’s Often the First Step to Financial Disaster
Rather than fixing the problem, bankruptcy makes it much worse. Not only does it render a person’s credit score completely useless, but it also gives them a fresh start without supplying them with the knowledge they need to proceed.
It takes many years and many mistakes to get into debt, and “fixing” it with bankruptcy is like patching a broken pipe with duct tape—it will stem the flow temporarily, but eventually that tape will split and the problem will issue forth once again.
That’s why we always recommend debt counseling before bankruptcy is filed and before any other drastic steps are taken. If you find yourself in this position then give us a call on (888) 431-6751 for some free counseling and advice.
2. It’s Expensive
One of the lesser known issues with bankruptcy is that it can be very expensive, and you can’t simply accumulate the expense as extra debt and then have it wiped clean once the bankruptcy kicks in.
You will need to pay to file for bankruptcy and you will also need to pay for a bankruptcy attorney. And you can expect to pay these fees upfront, because your attorney will know better than to accept credit.
The amount you pay will depend on a number of factors, including the type of bankruptcy that you file for. There are ways to reduce the cost, but you can not avoid paying fees altogether.
1. There are Better Options
Finally, the biggest misunderstanding is that bankruptcy is somehow the only or even the best way out of serious debt. This is definitely not the case. There are many things that you should consider before you get to this stage, and even then you should still make absolutely sure that you have exhausted all other options:
- Get Help: As discussed above, there are counseling programs that can help you. Speaking with an expert can really make a massive difference. You may think that no one can help you and that you have already reviewed all options, but they can approach it from a professional standpoint and advise on the best course of action going forward.
- Negotiate: Creditors want you to pay off your debts as much as you do, and if you can’t pay them then they may offer to reduce them. Call them and let them know that you are struggling and need some help. They may offer to reduce the interest or provide you with a grace period. If you can pay the debts off quickly, they may offer to take much less than the total amount.
- Consolidate: If you have not already consolidated your debts, this is a great option to take. It involves taking out a large loan with a low interest rate and then using that loan to pay off your other debts. It means you only have one debt to pay and as it doesn’t charge a high rate, it’s not going to cripple you financially.
- Reduce Spending and Sell Up: This is something you should do regardless. If you’re in debt you need to make sacrifices, which includes reducing your spending, tightening your budget, and selling anything around the home that doesn’t get used and has a high value. You can’t afford to be frivolous or sentimental at times like this, not when you consider that the worst case scenario will see you lose all of those things anyway. At least this way you are in control of what gets sold, for how much, and to whom.