If you’re thinking of declaring bankruptcy, read this first
Is your family struggling to keep up financially? Are you and your partner under water with shared household expenses? If you owe a significant amount of money in credit card debt or medical bills, it may seem appealing to file for bankruptcy. It offers a chance to hit the “redo” button on your financial life, since all your debt would essentially disappear. But here’s why bankruptcy should only be used as a last resort.
First, some background: If your petition for bankruptcy is accepted, your debts will be “discharged,” meaning you’ll be off the hook for the money you owe to creditors such as your landlord, doctors, and credit card companies. Some of your assets can be seized to pay off these creditors, but depending on which state you live in, you may be able to work out a deal where you get to keep your car, home, and household possessions. And it may not be long before you can start borrowing money again (though, unsurprisingly, I’d strongly advise you to proceed with caution).
That said, filing for bankruptcy is generally not an option that most of us should consider. For starters, there’s a long list of debts that can’t be forgiven, such as student loans. What’s more, bankruptcy is noted on your credit report for 10 years. True, you may be able to get some form of credit within a few years, but you probably won’t be eligible for low-rate credit cards or decent loan deals for many years. And you won’t be able to apply for certain kinds of student loans (like Grad PLUS loans) if you’re thinking about going back to school. Finally, you may have trouble getting a job, since many employers run credit checks on prospective hires and will learn from your credit report that you declared bankruptcy (even though that practice is under scrutiny at the moment).
To give you some background, there are a few different kinds of bankruptcy, but the one most commonly filed by consumers like you is Chapter 7 (the court discharges your debts), and others may opt for Chapter 13 (the court sets up a repayment plan). First, you should evaluate whether or not bankruptcy makes sense for you. If you decide to move forward, you’ll then have to complete credit counseling with a U.S. Trustee’s office-approved agency to determine whether it’s really necessary. Then, you’ll fill out some paperwork and submit it with a fee ($299) to a federal bankruptcy court. You’ll also probably need to pay a bankruptcy lawyer to help with the case. Before your case is over, you’ll have to attend another counseling session to learn how to manage your personal finances.