Saturday, May 4, 2019

Fear of Bankruptcy

Many people are afraid of bankruptcy. Many of my clients are afraid of losing their cars, houses, or other assets. Some are afraid of damage to their credit reports. Below I'll discuss those two issues in brief. You will need to consult with us for a full explanation of how the law applies to your individual situation.

Fear of Lost Assets (car, house, etc.) 
Chapter 13 bankruptcy does not have this issue. However, it is true, that in a chapter 7 bankruptcy, the law puts you through a "liquidation" of assets. That basically means the selling of assets and using the funds to pay creditors. However, Ohio law provides a robust series of "exemptions." Those exemptions prevent property from being liquidated in a chapter 7 bankruptcy. I know how to apply those exemptions. I know what the trustees who examine those exemptions are looking for. I have personally never represented a client who lost their car in a chapter 7 bankruptcy that I filed for them.

Generally speaking, I cannot make a promise to you on this, but you should not avoid a bankruptcy consultation with my firm for fear of losing your car. If it is a possibility, we'll be sure to explain that to you in detail before you file your bankruptcy case.

Fear of Credit Report Damage 
The credit report is a complex subject. There are great explanations out there on how it works and what effects it in several books. This is not a full-throated explanation of the credit reporting system. Just a brief description of how bankruptcy will effect it.

This is somewhat of an oversimplification, but for the purpose of this discussion, there are three main ways to get a good credit score: 1) pay your bills on time, 2) have a good debt-to-income ratio, and 3) own real estate.

Your credit score will reflect that you filed bankruptcy for around eight years. However, bankruptcy is just one of many factors taken into consideration in your credit score. As long as you are strong in the three factors above, in the long term, your score will be strong.

If your credit score is really good, it is likely a bankruptcy will bring it down for at least a few months. However, if you remain strong in the three categories above, it will come back up.

If your credit score is really bad, it is likely a bankruptcy will have no effect or even improve your score (in the long term). This is because a bankruptcy will wipe out your debts, thereby improving your debt-to-income ratio. If you pay your bills on time and manage your debt wisely, your credit score will improve. Eventually, you'll get to a place where you can purchase some real estate and develop a strong score.

But what if you are somewhere in the middle? The bankruptcy's effect on your score is probably going to be negative in the short term. Where you end up in the long term is the same though: generally speaking, if you pay your bills on time and manage your debt wisely, your credit score will improve.

In my follow-up conversations with clients, I have been told that they begin receiving offers for credit and car loans almost immediately after filing bankruptcy. I have been contacted by multiple car loan companies that seek specifically to work with recent bankruptcy filers.

This is probably because the vast majority of bankruptcy filers are determined to get on the right track after filing. The default rate for bankruptcy filers is relatively low. Plus, creditors know you cannot file again for quite a while.

Conclusion: If you are considering bankruptcy, come have a consultation with us or a reputable credit counseling company like It is likely your fears will be alleviated.

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