Bankruptcy. It’s a word that evokes a lot of different emotions and responses. “It’s a cheap way to get out of debt.” “Or perhaps it’s the fresh start someone needs.” “But if they hadn’t gotten themselves into debt in the first place.” “Then again, they didn’t choose to get sick and end up with the medical bills they have.” “I pay my bills so why can’t they?” “I can’t pay my bills so what’s wrong with me?”
The comments could go back and forth for ever and certainly have since the advent of bankruptcy. In reality, bankruptcy is not the right answer for everyone, but it may be the best option for some. It’s not always an easy choice to make.
Whether or not to file bankruptcy is a very personal decision. No way am I going to make that decision for you here today. Instead, I just want to give you some things to think about if you are considering bankruptcy.
It will hurt your credit score. True, at least temporarily. But if you are so overwhelmed by debt that there is no other way to deal with it, your credit score is going to keep heading down anyway. While bankruptcy may well cause an immediate drop in your score, it can be the fresh start to give you breathing room towards improving your credit history and score…. If you are going to own it and continue to work on your credit on your own.
It will cost you to file bankruptcy. It will vary location by location, but in South Dakota it will cost you an average of $2,000 to file bankruptcy. If you only owe $1,000, DON’T FILE BANKRUPTCY! Some of these expenses will be paid up front and some you may be billed for, paying them back later. This is one of those places where savings become so important.
Not everyone qualifies for bankruptcy. During one of your first meetings with your bankruptcy attorney, they will complete the Means Test. This looks at your income, expenses, and debt to see if you even qualify to file. Essentially, it is the laws enforcing the idea that if you really can afford your payments, you need to make them. Or you may qualify for one type of bankruptcy (chapter 13) and not the other (chapter 7).
Not all debt goes away. Sure, that’s the point of bankruptcy. But they don’t let you out of everything. For example, child support, tax debt, restitution, and most student loans don’t go away. Depending on what type of debt you have, it may not be worth filing bankruptcy regardless of your total debt amount.
It’s public record. If you file bankruptcy, it will be published in the local newspaper. People could find out that you are filing. Fortunately, the public’s stigma of filing bankruptcy seems to have significantly decreased in recent history. People (other than lenders, banks, etc.) just don’t seem to care as much. Besides, how many people really even read the newspaper anymore?
Bankruptcy is not forever. First, it does go away as far as your credit history is concerned. Second, the freedom from debt that bankruptcy delivers isn’t forever. If you don’t address those things that got you into debt in the first place, you are going to be right back in the hole of debt. Bankruptcy law also limits how often you can file bankruptcy depending on which type you file. With freedom comes responsibility.
I’ll admit, I’ve never had to file bankruptcy myself. But I’ve talked with people who have. Even for those for whom it is the best option, it’s not an easy process to go through. The good news is that you don’t have to go it alone. First, find a good bankruptcy attorney to help with the process. Good is often the opposite of cheapest, but you get what you pay for. What kind of help do you want as you go through bankruptcy?
Before you even commit to filing bankruptcy, talk with a not-for-profit credit counselor. They can walk through your debt, expenses, and income with you and present you with all of your options. You retain all decision making, but can do it informed and with help.
If you would like someone to look at your situation with you, the counselors at the Center for Financial Resources would be happy to help. Unlike filing bankruptcy, our services are confidential and do not cost anywhere near $2,000 per visit. Nor do we judge anyone for the decisions they make. You can call us at 605-330-2700 or schedule an appointment online.
written by Breck Miller
images courtesy freedigitalphotos.net