Like many people, I’ve had some financial difficulties. But, fortunately, I’ve never been in dire straits – drowning in debt with no way out.
If I did face a financial catastrophe, I’d be tempted to file for bankruptcy. After all, people do it all the time, and it seems like an easy escape from creditors.
I decided to find out. I know several people who once filed for bankruptcy and seem to be doing fine today.
Why not declare bankruptcy, walk away from your mountain of debt and get a fresh financial start?
“The most obvious disadvantage of filing bankruptcy is that it will ruin your credit for at least seven to 10 years,” according to legalmatch.com.
Oh, that’s not good.
“Some other disadvantages,” the website says, “include losing credit cards, losing non-essential possessions, inability to obtain a mortgage for some time, embarrassment, [and] not all debts will be discharged.”
Maybe I was wrong about bankruptcy being like a get-out-of-jail-free card. But in today’s dismal economy, many people are filing for bankruptcy. So there must be some benefits, right?
“As soon as a debtor files for bankruptcy, there is an automatic stay and most creditors must stop their collection efforts,” legalmatch.com says. “Filing for bankruptcy will allow many debtors to get started sooner on rebuilding their credit in peace.”
Don’t seek bankruptcy hastily
Although filing for bankruptcy has some advantages, it’s a serious action that can have far-reaching consequences.
“Explore all your options before deciding to file for Chapter 7 or Chapter 13,” according to a recent Chicago Tribune article by Andrew Leckey.
Bankruptcy is “not a panacea to lift up all your financial troubles and put a smile on your face, as late-night television commercials would have you believe,” he writes.
For starters, filing for bankruptcy can be expensive. It can cost up to $2,500 in court and attorney fees for Chapter 7, the most common personal bankruptcy, Leckey says.
“Declaring bankruptcy doesn’t kill chances of ever getting a loan again, because creditors watch for a few years of good, timely payments on bills,” he continues. “A more significant change will be getting a comfortable loan. You don’t want to be required – based on your past credit history – to pay interest rates so high that it is difficult to stay current with payments.”
Despite its drawbacks, filing bankruptcy can sometimes be the best option.
“For some folks, there just isn’t going to be a scenario in which they can pay off their debts,” says Kim McGrigg of the nonprofit Money Management International in the Chicago Tribune article.
Why do most people wind up having to file for bankruptcy? Loss of a job? Medical expenses? Costly divorce?
No, says Gail Cunningham of the nonprofit National Foundation for Credit Counseling. The most common reason for facing financial ruin: spending too much and not saving enough, she says in the article.
“In my 25 years in credit counseling, I’ve never once met someone who said they’d saved too much,” Cunningham says. “The millions who have lost their jobs are ever so thankful for any savings they had built up.”
Bankruptcy is an option you may need to consider if you’re falling further and further into debt. But realize the negative consequences. Seek advice from an attorney or credit counselor before filing for bankruptcy.