Wednesday, October 1, 2014

Should You File Bankruptcy?

Nobody files for bankruptcy protection because they want to. It is a serious decision and scares many people. As I will discuss below, there is no shame in making the right decision for you, your family, and your community.

There are many reasons not to be scared of bankruptcy. Once you consult with an experienced attorney and weigh your options, there is no reason to delay or be scared once you decide it is the right decision for you.

Here are a few questions to ask yourself right off the bat:

1.      Have you consulted with a reputable financial adviser?
2.      Do you feel your financial situation is uncontrollable?
3.      Are you not answering your phone or sick of getting calls about debt collection?
4.      Are you using credit or borrowed money to pay for necessities?
5.      If I asked you “how much debt do you have?” would you be able to answer that question?

Each of these questions are important when deciding to file for bankruptcy protection. Generally, you need to think of it on a 7-10 year timeframe. After about 7 years, your bankruptcy will likely not appear on your credit report any longer (although it will be a public record). The harshest consequence of filing bankruptcy (in my opinion) is that it appears on your credit report, although there are other personal issues I discuss with my clients as a counselor.  

That being the case, will your financial situation improve in the next 7 years? If you are only making the minimum payments on credit cards, racking up new debt to pay for necessities, and not in control of your finances—then most likely your financial situation will still be bad in7 years.  

If you file bankruptcy now, most of your debt will be gone immediately. In 7 years, the bankruptcy damage to your credit will begin to repair. So essentially, after that period, the harshest consequence to filing bankruptcy is mitigated. Again, the courts and Congress have made the point of bankruptcy law clear: it is to get people a fresh start so that they can be productive members of society.

Depending on other circumstances, you may see improvements in your credit worthiness after filing bankruptcy within a year or so. I have written about how retirees and other categories of people have no reason not to file bankruptcy if they cannot live a productive life with their current debt.

The point of bankruptcy is to invoke some ancient rules that go all the way back to the Old Testament. These rules are designed to make you and your community better by offering you the opportunity to become a productive citizen again. We want you working gainfully, not just paying off old debts for the rest of your life.

Thanks to a follower on Facebook, I have decided to do an update to this article. She questioned the 7 year time frame I speak of above. Here is how it is put by Free Credit

"Credit reports and scores were designed to assist lenders in deciding who was more or less likely to fulfill their financial obligations.  When someone files for bankruptcy, it's extremely damaging to their credit score as it's a failure to meet all (or almost all) of their financial obligations.  While through discipline and hard work, it is possible to quickly bounce back from the financial implications of a bankruptcy, the credit implications will last for at least seven years.  During that time period, it is unlikely that a person will be approved for new loans or credit accounts, and if they are the terms are likely to include high fees and interest rates."

As I wrote above, the credit damage begins to repair. Essentially, the bulk of the negative effects are worn off by the point. So I stand by my 7 year time frame, although it is definitely 10 years for the full recovery.

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