The Truth About Bankruptcy

Declaring bankruptcy is one of the most intense and personal financial decisions anyone can make and should never be taken lightly.





You've been getting letters and calls for a while, you've done all you could to try to keep your word and pay everyone back, you've cut back on spending, you've sold stuff to make payments, you've cut what feels like absolutely everything, but even with all the work, you’ve come to one painful conclusion—you may need to file bankruptcy.


Bankruptcy is confusing, not to mention emotionally devastating. It’s a serious decision, and we don’t want you to have surprises along the way. Here are some things you need to know before you take the first step.


What is bankruptcy?

Bankruptcy is a court proceeding where you tell a judge you can’t pay your debts. The judge and court trustee examine your assets and liabilities to decide whether to discharge those debts. If the court finds that you really have no means to pay back your debt, you declare bankruptcy.


Bankruptcy can stop foreclosure on your home, repossession of property, or garnishment of your wages. Bankruptcy can cancel many of your debts, but not everything is bankrupt-able.

Bankruptcy doesn’t clear:

  • Student loans

  • Government debts such as taxes, fines or penalties

  • Criminal restitution

  • Child support and alimony

  • Items with an asset attached that you reaffirm, such as cars, boats, motorcycles, houses.


When you file for bankruptcy, creditors have to stop any effort to collect money from you, at least temporarily. Most creditors can’t write, call or sue you after you’ve filed. However, even if you declare bankruptcy, the courts can require you to pay back certain debts. Each bankruptcy case is unique, and only a court can decide the details of your own bankruptcy.


What are the main types of bankruptcy?


There are two main types of bankruptcy for consumers. Chapter 13 and Chapter 7.


Chapter 13

Chapter 13, you'll work with an accredited agency on a court approved structured repayment plan, where you'll repay some or all of your debts over three to five years. You get to keep your assets (the stuff you own) and you’re given time to bring your mortgage up to date. Any remaining debt left over after the period, such as credit cards are waived. In a chapter 13 your co-signers will be protected.

This kind of bankruptcy stays on your credit report for seven years.


Chapter 7

Chapter 7 means the court sells all your assets—with some exemptions—so you can pay back as much debt as possible. The remaining unpaid debt is erased. Depending on your state you could also lose your home (or the equity you’ve put into it) and your car in the process, depending on what the court decides, there is an important caveat to all of this, a co-signer. If you have a co-signer, they will be asked to cover any remaining debts they signed on


You can only file Chapter 7 bankruptcy if the court decides your income is too low to pay back your debt. This type of bankruptcy stays on your credit report for 10 years.


Other types of bankruptcies:

You’ve probably heard of other types of bankruptcy, like Chapter 11. It’s typically reserved for businesses. You may also hear of Chapter 12 bankruptcy, which is for farmers and fishermen.


For specific information about bankruptcy laws in your area, visit the United States Courts website. There you’ll find information on the process and where to find help in your area. There is a bankruptcy court for each judicial district in the United States—90 districts in all.



What are the consequences of filing bankruptcy?


Your bankruptcy becomes public domain. This means your name and other personal information will appear in court records for the public to access. That’s right . . . potential employers, banks, clients and businesses can access the details of your bankruptcy.


Credit

Your credit scores could dive as much as 200 points. However, if you are filing bankruptcy with an already low score, your credit score might not change drastically.


Auto insurance rate increases

You could see a considerable increase in your auto insurance rates


Filing bankruptcy is expensive. Filing fees for Chapter 13 bankruptcy will cost around $310 plus attorney fees, which can be anywhere from $1,500 to $6,000. For a Chapter 7 bankruptcy, you’ll pay $335 for filing fees and $835 to $3,835 for an attorney.


Buying & renting a home could be more complicated. Unless you pay cash for a home, it could take one to four years before you'll qualify for a mortgage.


Employment

In some extreme cases, obtaining employment may become more difficult.


What should I do before I file for bankruptcy?

Filing for bankruptcy is a big deal, so you don’t want to go into the process blind. Here are some things you need to do before you take any action:


1. Organize your paperwork.

Make a list of all debts, mortgage payment, student loans, child support, car loans, credits card and personal loans. For each of those debts, find paperwork to verify the amounts. If you talk to anyone (lawyer or financial coach), you’ll need this information.


2. Look at options.

Before you file, do everything possible to get on a basic no life budget, you should not be "blowing" any more on enjoyment at this point. Talk with creditors about lowering interest rates or getting better terms. Move to a smaller place. Get an extra job to pay the bills.


3. Try financial coaching.

Connecting with a financial coach can provide different & unbiased prospective on your situation.

We can talk with you about alternatives to bankruptcy and create a customized plan to get you out of the red, during the process we can give you encouragement and that extra kick in the right direction!


4. Get professional help.

If you’ve done everything you can and still can’t get your head above water, bankruptcy may be your only option. Filing is complicated and involves lots of paperwork and the potential for mistakes. Working with a pro is your best option for walking through the process.



How can Clear Direction Financial help you?

Regardless of where you are, whether thinking about filing to starting over or have already filed we're here to help you establish life-long smart money habits. Here are three ways we can help:

First, if your family decides to file bankruptcy, we’ll be here to help you during the process and give you the tools to restore your hope after your bankruptcy is discharged. We’ll never get angry with someone for filing bankruptcy. It’s a difficult, emotional situation. We get that.

Second, if you haven’t filed yet, we'll book some time to go over your situation to find a better option than bankruptcy if at all possible. Our ultimate goal is to help you get you back on solid ground. Bankruptcy is a setback, but your situation—no matter how bad—is never hopeless.

Third, if you think there’s any possible way to avoid bankruptcy, we’d like to connect with you, if you're willing to do the hard work we're willing to walk with you.

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