If you are like me, the word “bankruptcy” sounds very scary. I have tried hard over my adult career to protect my credit score, to nourish it and coddle it so that it will impress even the most stringent creditor. I used to believe that a bankruptcy would simply destroy all that I had worked so hard to achieve. Plus, filing bankruptcy was for those who could not manage their own money or were shop-a-holics.
In reality, the three main causes of having to file bankruptcy are: 1) divorce; 2) medical bills; and 3) sudden job loss. So, really, we are all just one step away from a bankruptcy. Even the most prudent and dedicated money savers would be hard pressed if there was a medical situation or if they suddenly lost their job. And, we have all heard horror stories involving a divorce where one got stuck with all the debt.
Bankruptcy is not as scary of a thought once you learn some basic things about it. First, it affects all walks of life. Rich people, teachers, priests, widows, poor people, athletes and movie stars are all among those who have filed for bankruptcy. The majority of these are consumer (aka personal) bankruptcies and are referred to as Chapter 7s and Chapter 13s.
A Chapter 7 is when your monthly income is lower than your living expenses and you cannot pay your bills without going further into debt. In a Chapter 7 you essentially add up all your assets and all your debts and then liquidate (or sell) anything that the law says you cannot keep. You then take that money and use it to pay the creditors. Most who file for a Chapter 7 really do not have much to sell. At the end there is a “discharge.” A discharge is where all your debts, or what is left of the debts after the assets are distributed, are wiped away. This means you do not have to pay the debts, regardless of how big they are, ever.
A Chapter 13 takes more time but may be your only alternative. You see, not everyone qualifies for a Chapter 7. Basically, if your income is higher than living expenses but you cannot pay your bills on time, if ever, then your only option may be a Chapter 13. In a Chapter 13 you “reorganize.” This means that you come up with a payment plan to pay your debts for a period of 3-5 years. Then, at the end of the time period, any debts left are “discharged.”
So, at the end of either a Chapter 7 or a Chapter 13 your debts will be discharged. However, you need to know that there are some debts that cannot be discharged. These include debts such as certain taxes, student loans, criminal fines and restitution and child support/alimony.
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Bankruptcy has many advantages other than getting debts discharged. One of the most important advantages is that it requires any and all creditors from contacting and harassing you ! Anyone who has experienced this first hand will tell you that the relief bankruptcy brings in stopping the phone calls is priceless. Additionally, it can stop a garnishment and can even stop or delay a foreclosure. This is good to keep in mind in today’s economy and housing market.
Yes, there are some disadvantages. As a rule of thumb, you are only allowed a Chapter 7 discharge once every 8 years and there are limits on how often you can file a Chapter 13. Plus, it will show up on your credit report for up to 10 years. With this being said, remember that as soon as you file, you can immediately start to reestablish your credit. You see, since you cannot file again for a while, credit companies will want to be first in line to extend credit again.
The way I see it; bankruptcy is simply a financial strategy. Bankruptcy has been around since the dawn of time. It may have been called different names, but it has been here. Many have used it to their advantage and will continue to do so. The reality is that there is nothing to be embarrassed or ashamed about should you have to file for bankruptcy, it is simply a strategy and one that can bring you financial freedom. Again, bankruptcy is a tool to be used to create your own financial freedom.