4 facts to know before you file for bankruptcy
By Miranda Marquit
December 18, 2014
We are conditioned to think of bankruptcy as a “mulligan” when it comes to finances, that it's supposed to be a “free pass” to getting rid of debt and starting all over again.
The reality of bankruptcy is that it is difficult and expensive, and not every debt you have can be discharged. “I counsel people to consider bankruptcy as a last resort,” says Leslie Tayne, a financial attorney and debt specialist with Tayne Law Group.
In fact, a study from Ohio State University and the University of Maine suggests that it takes 10 to 20 years for most Americans to recover from bankruptcy. It can take as long as 26 years for a bankruptcy filer to catch up with his non-filing peers in terms of net worth, the study shows.
Before you file for bankruptcy, here are a few things to keep in mind:
Your credit rating will plunge
“Is your current debt large enough to be worth the risk of being denied for future rental, mortgage, auto and other credit?” asks Joji Varghese, a credit counselor with ClearPoint Credit Counseling Solutions.
A bankruptcy remains on your credit report for 10 years, and can affect your ability to borrow in the future. It lowers your credit score, and a lower score can influence your insurance rates, your ability to rent and other aspects of your financial life. “Bankruptcy can lower the credit score of someone with otherwise good credit in excess of 100 points,” Varghese continues. “It is worse than delinquencies or accounts in collections.”
Your situation should be dire if you are willing to accept short-term relief at such a high long-term cost.
Not every debt can be discharged
Most consumers have access to two different types of bankruptcy. Chapter 7 bankruptcy is what most people think of when they consider bankruptcy. However, there are income restrictions making it difficult for some people to qualify for this type of relief. However, you may qualify for Chapter 13 bankruptcy, which requires that you repay at least some of your debts through a repayment plan.
No matter which type of bankruptcy you are eligible for, there are some debts you can't discharge. Taxes, student loans, child support and alimony all remain in full force when you go through bankruptcy proceedings. If you are contemplating bankruptcy in order to avoid such obligations, you will be disappointed.
Paperwork, paperwork, paperwork
You will need documentation for the court, and reviewing your finances can perhaps help you identify alternatives to bankruptcy.
“Get a copy of your credit report so you are aware of how much debt you actually have,” suggests Tayne. She also recommends gathering your tax information, since it serves as proof of your income and situation.
Tayne says a bankruptcy attorney can evaluate your situation and advise you as to your next steps.
Plan your life after bankruptcy
Before you file for bankruptcy, you should have an idea of what you will do with your life afterward. You don't want to fall back into the habits that led to your bankruptcy in the first place. While you can file for bankruptcy more than once after several years have passed, there are laws governing this practice; serial filers can eventually find themselves in trouble with the law.
“Know your income sources and make sure that you can secure your financial future on your current income,” says Tayne. “You may have to consider some sacrifices and lifestyle alternatives while getting back on your feet.”