Bankruptcy Debunked: What You Need to Know
In this day and age, where so many are so quick to share so much on social media outlets across the internet, there is one issue that remains taboo: finances. No one likes to talk about money, how much or how little they have, but it is a common stress that unites most people.
Bankruptcy in particular has a terrible connotation throughout our society. Declaring bankruptcy is the process whereby a person or entity can legally eliminate, or drastically reduce, their amount of debt. With many well-known corporations throughout the United States filing for bankruptcy, including Toys ‘R’ Us, I Heart Media, Claire’s, Remington and more, it’s time to take a look what bankruptcy actually is, and the myths and facts behind it.
The first and most important fact that everyone should know about bankruptcy is that it is not the end of the world. Financial problems do not mean that someone is a bad person or irresponsible. Often it is the first step to the beginning of a new and better life for them and their family. For many, bankruptcy can actually be helpful in reducing debt.
What You Need to Know
There are four main types of bankruptcy. The first, Chapter 7, is commonly known as “liquidation” or “straight” bankruptcy. This is the type that people normally envision when they hear the word “bankruptcy.” If you file under Chapter 7, unsecured debt, such as medical bills or credit card debt, can be eliminated. Some personal property may go to creditors under Chapter 7, while some may be protected. (There is no repayment plan under Chapter 7; your debts more or less disappear).
Chapter 11 is a type of bankruptcy (normally used by businesses) known as “reorganization.” All types of debt, including loans, taxes, rent, etc., are discharged by Chapter 11. There are no limits to the debt, and while it is normally used for businesses, it can be used by individuals who fall under certain circumstances.
Chapter 12 bankruptcy is specially tailored for family farmers and fishermen. It is a personal or corporate repayment plan, and is operated in such a way that the business is allowed to remain operational and open while the debt is being repaid. Chapter 12 bankruptcy also attempts to protect the business from having to liquidate assets.
Chapter 13 bankruptcy is also known as “debt adjustment.” Chapter 13 is a repayment plan for individuals with regular income, and it allows debts to be paid off over time. This helps those in debt to avoid foreclosure or repossession of property. Debts such as child support, mortgages, and money owed to the IRS are included in this type of repayment.
Fake News About Bankruptcy
The types of bankruptcy most commonly seen in the U.S. are Chapters 7 and 13. While the process isn’t easy, it also is not meant to embarrass or shame anyone. Here are the top five myths to consider when it comes to bankruptcy.
1. My Financial Life Is Ruined
Many think that filing for bankruptcy will leave them limited financially forever. That isn’t true. While your access to credit will be limited, and you might have to pay higher interest rates for 7-10 years, your credit score tends to bounce back about 6-8 months after filing. On top of that, there are many ways to start restoring your credit score. You can get a secured credit card or a secured loan. You can also have someone co-sign a loan or credit card. The most important thing is to have a fiscal plan that you stick to, and to check your credit score regularly.
2. My Private Pain Goes Public
Don’t worry: unless you’re famous or part of a major corporation and the media gets hold of the news, chances are slim that anyone other than your creditors will know that you’ve filed. Huge numbers of people file for bankruptcy, so even though it is a public legal proceeding, very few news outlets or other publications have the interest or space to do a story on each one.
3. It Will Tear My Marriage Apart
While it isn’t uncommon for spouses to file for bankruptcy together, it is not a necessity. Many times, one person can have a significant amount of debt in his or her name only, and the spouse is not liable. In many cases, both of them will have quite a bit of debt, and sometimes it makes sense for both to file, but it is never a requirement. Don’t worry: Many couples have weathered the bankruptcy storm together and come out stronger on the other side.
4. Pay It to Delay It
Bankruptcy should never be a decision to take lightly, but it also is not necessarily a bad idea. If your debts are more than 50% of your income, and you don’t see a way to pay them within the next five years, bankruptcy is probably your best path forward to living a debt-free life. While you’ll take a small hit on your credit in the short term, the stress relief of getting the problem solved quickly will often make more sense than spending the next 7-10 years buckling under the weight of crippling debt that may have come to you through no fault of your own (loss of income due to death of spouse, major medical bills, etc.).
5. Only Losers File for Bankruptcy
Many good, hardworking people struggle with finances. Bankruptcy is a way for those good people to get some financial relief. Divorce, loss of job, or medical problems often cause financial hardships that are unforeseen and that many people are ill-prepared to handle. These types of situations don’t make someone bad. You are not a deadbeat or a loser if you have to file for bankruptcy. It is sometimes the most responsible step you can take on behalf of yourself, your family, and your family’s financial future.