7 Bankruptcy Facts You Need to Know

Published on August 1, 2016 by Lauren
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    Don't make this decision lightly - here are 7 Bankruptcy facts you NEED to know.

    Are you buried in debt? As the bills pile up, thoughts of filing for bankruptcy might be on your mind. It’s a scary and sometimes hopeless feeling (trust me, I've been there myself), but you have options but you need to know the bankruptcy facts first.

    Eight years ago, when our home was hopelessly underwater and we were in tons of debt, we were so eager to get out of our financial mess that we were willing to walk away from our house. This would have meant a foreclosure, and also a bankruptcy. Thankfully we didn't do this since we had another option, and learned how to successfully budget and pay down the debt with the money saved.

    If you've tried to budget in the past but failed, I recommend reading my book The Recovering Spender.  I also want to give you a free gift: Simply sign up for my free email community below and I will send you a free budgeting back AND a free budget spreadsheet!

    Back to bankruptcy – filing for bankruptcy can help you get a new start, but it’s not a decision to take lightly. Starting with a clean slate may be the best way to deal with your money problems, but it’s not always the best course of action. Bankruptcy comes with serious consequences that may be felt for many years.

    Obviously, it’s best to talk to a bankruptcy attorney before you make any final decisions. My recommendation is that you should try these 7 steps to negotiating your delinquent debt before bankruptcy. You may need a lawyer's guidance as you move through the process. However, if you’re considering filing.

    Here are some bankruptcy facts you should know before making that first call:

    1. There’s More than One Type of Bankruptcy

    Before filing for bankruptcy, keep in mind that there is more than one type of bankruptcy. Each type has certain restrictions and differing outcomes. The two most common bankruptcy filings for individuals are:

    • Chapter 7 Bankruptcy – Known as “liquidation” or “straight bankruptcy,” filing Chapter 7 bankruptcy generally allows debtors to discharge the majority of their debts and wipe the slate clean. Chapter 7 also requires the debtor to sell or liquidate many of their assets to pay back the debts.
    • Chapter 13 Bankruptcy – This type of bankruptcy allows individuals to reorganize their debt and make payments to their creditors over an extended period of time. The process generally lasts three to five years. The debtor’s assets are not liquidated, and any additional debt owed after the required payment period is typically discharged.

    bankruptcy facts

    2. Not Everything Is Discharged

    Even if you file for Chapter 7 bankruptcy, not everything is forgiven. There are a number of debts that usually can’t be discharged in bankruptcy. Some of these include most student loans, real estate liens (on things like your mortgage debt), alimony, child support, and most taxes. Furthermore, creditors can object to the discharge of the debt they are owed. If they win, you’ll still owe the money.

    3. Your Income Matters

    When you file for bankruptcy, the amount of money you make matters. Although anybody can file for bankruptcy, your income may disqualify you from filing for certain types of bankruptcy. For instance, you may make too much money to file for Chapter 7, meaning you’ll be required to file for Chapter 13 instead. If you do file for Chapter 13, the amount you make has a big impact on the way your debt is restructured.

    4. It’s Not Free

    Filing for bankruptcy means you’ll need to hire a lawyer. In most cases, your attorney fees are not free and can’t be added to your bankruptcy filing. Additionally, you may be required to pay for court costs. Also note that fees for Chapter 13 are generally higher because the process takes more time.

    5. Bankruptcy Destroys Your Credit

    Filing for bankruptcy is like dropping a nuclear bomb on your credit score. Your payment history determines 35% of your score, and a bankruptcy is a giant blot against that. It’s also a decision that has long lasting effects on your ability to secure a loan and utilize credit.

    A bankruptcy stays on your credit report for up to 10 years, so this isn’t a decision to be taken lightly. During that time, buying a house, getting a credit card, or even landing certain jobs could be difficult. Additionally, the filing becomes public record. That means anybody who wants to can get up in your business.

    6. It Doesn’t Cure the Root Problems

    Filing for bankruptcy may help you discharge or restructure your debt, but it doesn’t cure the problems that got you there in the first place. Yes, bankruptcy may be a good option to help you get back to even. However, if you’ve run up mountains of debt due to poor financial decisions or an addiction to spending, those same impulses will still be around after the debt is gone.

    When we were considering bankruptcy, it was 100% due to poor financial decisions and a spending addiction. But I overcame these issues. If you can relate in any way, then you might want to check out my brand new book, The Recovering Spender. It's the financial book that you will FINALLY be able to relate to.

    Filing for bankruptcy can provide you with some much needed relief, but the real work is up to you. The only way to heal is to attack the root cause of your bankruptcy and change your behaviors. Learning to use a budget, tracking your spending, and avoiding debt are just a few things that can lead you toward financial health.

    7. You Have Other Options

    Of course, there are other options besides bankruptcy. You can:

    • Renegotiate Your Debts – Negotiate with creditors to adjust the terms of your loan, or make an offer to get your debt forgiven. Be sure to get any agreements in writing. It’s not easy, but usually creditors would rather get some money rather than nothing.
    • Create a Debt Payoff Plan – Eliminate your debts quickly by using the debt snowball method. First, limit your spending to essentials only. Then, use all of your available income to make extra payments toward your smallest debt. Continue making minimum payments on the rest. Once the smallest debt is eliminated, move on to your next smallest debt. Repeat the process until all of your debts are paid off.  We talk all about this in our online finance course called The Financial Renovation – consider joining our community!
    • Consider Consolidation – If you’ve still got decent credit, you might consider consolidating your high-interest debt into a loan with a smaller interest rate or longer payment term. Use a company like SoFi to consolidate, which I highly recommend.  However, doing this can be dangerous if you don’t change your behavior! Use the breathing room to pay off your debt quickly, not as a way to delay repayment or run up more debt.

    Wrapping Up

    If you decide to file for bankruptcy, be sure to use it to your advantage. Whether you restructure or have your debt forgiven, don’t fall back into your old habits. Learn how to create a budget, avoid debt, and control your money so that you don’t end up back where you started.

    Of course, before you make your final decision, be sure to speak to a qualified bankruptcy attorney. They will review your case and help you determine which type of bankruptcy, if any, is right for you.

    Most of all, don’t lose hope. You aren’t the first person to face bankruptcy and you won’t be the last. There is life after bankruptcy, so keep your head up. Use this difficult lesson as motivation to make the changes needed to get ahead.

    Have you ever considered filing for bankruptcy? What are some things you learned? Let us know below!

    COMMENTS

  • Lauren, can you recommend a debt relief company? We are just making the minimum payments and need to get it down to one payment. Not sure where to look. Any advice would be greatly appreciated.

  • I like that you point out that your income matters when filing for bankruptcy. I can see why this would be important to be aware of if you are considering of doing this. You might find it helpful to have a consultation with a lawyer and ask them what would happen if you were to file for bankruptcy at that moment. They could possibly give you a walk through of how much things would cost and what the result would be.

  • Federal taxes CAN be discharged in bankruptcy as long as all the tax filings are in order. Not that I recommend it, but it’s a big myth out there.

  • when compiling your information for the lawyer to file Chap 7, is it safe to mention opiod addiction as one of the things that have put you in debt?

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