Debt Free Living

Don’t, don’t, don’t, don’t, don’t!!

That is my typical answer to anyone even thinking about bankruptcy. We are able to avoid this path almost 100% of the time but I want to cover it for completeness and for those that already have or are too far in to back out.

Bankruptcy comes in two forms, Chapter 7 and Chapter 11.

Chapter 7 is the version everyone wants but few get. In this version, the bankruptcy court wipes out all your debts and you get to start fresh and clean with virtually no debts. And it stays on your credit report for 10 years.

Chapter 11 is much more popular and what most people get roped into. In this version, the court forces your creditors to accept a payment plan they decide on. And it stays on your credit report for 7 years.

Here are the problems many people don’t consider when filing bankruptcy. It’s not a solution. It’s like getting a bigger bucket to stop your boat from sinking instead of fixing the leak. Most people who need bankruptcy got there because they couldn’t handle their spending. Filing bankruptcy doesn’t fix that problem, it only buys you time until you get more credit and end up in the same situation all over again. I can’t tell you how many clients I work with that wish they could file bankruptcy again because they are in the exact situation they were in before they filed bankruptcy their first time. They never fixed the problem so they simply end up repeating history.

Now I don’t mean to say that it’s all bad. It has helped a lot of people out of really tough situations and saved thousand’s of peoples homes from foreclosure. The only time I ever recommend bankruptcy is either for those that have ran up some extraordinary amount of medical debt that they would likely never pay off and for those about to lose their homes that can’t work out a solution with their mortgage company. For everyone else, there is almost certainly a better method.

There are also other catches that no one seems to tell you.

First, bankruptcy follows you for much longer than the 7 or 10 years it stays on your credit report. Many job applications or credit applications ask if you have ever filed bankruptcy. Ever. And you can certainly lie and say no, thinking they will never find out and they might not, but you have now committed fraud.

Next, in today’s economy it can take years before you are granted a credit card after bankruptcy. Think you don’t need one. Maybe you are correct, as long as you never travel, never stay in hotels, and never want need to rent a car. It’s almost impossible to do any of those things without a credit card and if you do get a credit card, it will almost certainly require you to put up a deposit. So if you think you have problems now, just wait until you try to restart your life after bankruptcy.

But never fear. There are better solutions and you can almost always avoid bankruptcy.

Stay tuned for my next edition.

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