Last year, 1.2 million people filed for bankruptcy, according to the Congressional Budget Office, and the trend indicates that the numbers will keep going up. Some people blame the ailing economy and its resulting impact (less cash flow, loss of jobs, and so on). Others point to the current low income rates, and the ease with which consumers today can obtain credit from lenders who cater to people's falling credit scores. However, going bankrupt is not the cut-and-dried system it used to be, and many are falling victim to lawyers and unscrupulous organizations who offer bankruptcy advice for a small fee. Here's some information on what and what not to believe when it comes to filing bankruptcy.
Myths about going bankrupt:
- All debts are wiped out in Chapter 7 bankruptcy:
Certain types of debt cannot be erased, including student loans and alimony or child support payments.
- You'll lose everything you have:
While state laws vary, certain assets are protected, such as your house, your car, your clothing, and retirement plans.
- You'll never get credit again:
This myth is rapidly being debunked, as getting credit after going bankrupt becomes steadily easier. While you may not be able to get credit from an average lender, depending on your situation, you probably will be able to go through sub-prime lenders at very high interest rates.
- It's really complicated to file for bankruptcy:
Not really. Technically, all you have to do is fill out the paperwork, and you don't need a lawyer — although it is recommended.
- You can only file for bankruptcy once:
You can file Chapter 7 every six years, and you can file for Chapter 13 more often than that, but you can only have one case open at a time. However, this is definitely not recommended, since even one bankruptcy filing puts a black mark on your credit report.
Types of bankruptcy filings
There are two options under which individuals may file bankruptcy:
- Chapter 7: You ask the court to wipe out your debts. However, in exchange you give up your property. As mentioned above, some debts are exempt, as are some types of property.
- Chapter 13: You work with the court to set up a plan to pay back your debts and you have three to five years to do so. You get to keep your property and your creditors usually have to accept less than the full amount for repayment
What to avoid
Avoid credit agencies or lawyers who say filing for Chapter 13 is not really filing for bankruptcy. And if you decide to go with a bankruptcy lawyer, do your homework on the lawyer. Some lawyers have failed to show up in court, causing clients to lose their property and go through more headache.
The way back from going bankrupt
Your bankruptcy filing will stay on your credit report for 10 years, as opposed to everything else, which goes away after 7 years. If you managed to keep your house, making mortgage payments on time will improve your credit rating. If you don't have a credit card, try a secured credit card, where you put down a deposit and receive a credit limit of a certain amount, then you pay the bill within the average 30 days. The focus needs to be on rebuilding your credit and proving to your creditors that you're responsible and have learned from your past mistakes.
By Virginia Zignego