There are any number of legitimate and valid reasons to file for Chapter 7 bankruptcy. There are almost as many misconceptions and myths surrounding the process, the results and the short- and long-term effects on your credit standing and general financial reputation.
Here I’ll examine a few of these common misconceptions and debunk the myths of a bankruptcy filling.
1. Folks who file for bankruptcy are irresponsible.
Certainly some people who file for bankruptcy have a history of some kind of abuse or fraud. However, it is far more likely that a sudden and catastrophic life change has necessitated the filing.
More often than not, the people who come to me for assistance in a bankruptcy filing are enduring a job loss or transition, experiencing long-term unemployment, undergoing a divorce or suffering a serious illness.
2. Bankruptcy discharges all past debts.
“Starting fresh” is often used as a way to put bankruptcy in as positive light as possible. And it’s not a bad way to think of it.
However, it’s a bit misleading.
There are, in fact, a number of types of debt you may have incurred that cannot be removed under any circumstance. If you have domestic support obligations including but not limited to alimony and child support, those payments may not be discharged.
Likewise, if you are paying restitution for a crime, those payments cannot be discharged under normal bankruptcy proceedings.
3. If you blindly spend money with wild abandon immediately prior to bankruptcy, you will be forgiven those debts.
Courts have ruled in the recent past that that spending constitutes fraud and debt that is incurred as a result of fraud cannot be discharged.
4. Bankruptcy will permanently ruin your credit.
Rebuilding your financial reputation after bankruptcy is never easy, but the business model of today’s credit card companies actually can be helpful.
Let me explain.
Credit card companies NEED new customers. That’s why they send out volumes of junk mail every day to entice us to sign up for their cards in the first place.
After your debt discharge, let me consult with you on obtaining a secured credit card with a low limit. Making on-time payments to this card will go a long way toward rebuilding your credit score.
Lita Epstein, author of The Complete Idiot’s Guide to Personal Bankruptcy, was quoted in the U.S. News Money blog as saying that “usually about six to 12 months [after obtaining the secured card] you can get a regular credit card and drop the secured credit card, since the secured card can be expensive.”
5. It’s a solution to all financial woes.
Bankruptcy cannot solve the underlying issues that led you to file for the bankruptcy.
It isn’t a solution. It’s a tool.
Depending upon your situation and how you file, there exists a chance that you could lose property and you’ll certainly be forced to significantly alter your lifestyle. Post-bankruptcy life is not easy, but if you look at it as a tool you can use to fix past mistakes or to clear a few hurdles, then you’ll come out of the process a stronger person.
If you have questions about bankruptcy and how filing may help you begin to repair your financial reputation, give me a call and let’s discuss it.