Filing bankruptcy might seem like the quick and easy out of the sticky situation you are in especially if you have a lot of debt under your name. You have probably heard from the news or from people you know that filing bankruptcy is a breeze and after the filing, you will be literally be freed from the debt you have incurred over the years. It is all true, that filing bankruptcy is not terribly difficult to do, and that your debt will be wiped clean post bankruptcy proceedings. But you should also be made aware of the consequences of filing for bankruptcy protection. It is not a get out of jail free pass, like what you have in the game of monopoly (initially made popular by Parker Brothers, which was eventually sold to Hasbro), but it is a serious decision that you have to take time to review and make sure that this decision is truly for you, and your family if you have one.
Why You Should Not File For Bankruptcy
If you actually have the means to payback your creditors in reasonable amount of time, then I strongly believe you should consider paying off your creditors and not file for bankruptcy protection. Talk to your creditors and work out a deal. Tell your creditors that you can pay them 50 cents on the dollar, hence cutting your debt obligation by 50%. Tell your creditors that you have limited funds to pay them back and the last thing you will want is to resort to filing for bankruptcy protection. Generally speaking the creditors, in this economic situation, will be happy to take 50% of the debt that is owed to them than nothing at all. Before you call your creditors, have a number in mind that you want to negotiate with the creditors. If you think you can pay for 75% of the debt, then start out by asking to pay back only 50% of the debt. It is a negotiation, and the creditors will try to retain as much payback as possible.
Ideally if you have the means to pay back (even if it is just a portion of the debt that you owe) the creditors, you should try as much as possible to pay back the creditors. The consequence for filing bankruptcy is that you will have the record that you have filed for bankruptcy for the next 7-10 years in your credit history. Having the mark that you have filed for bankruptcy means that you will have poor credit history and poor credit score for an extended period of time. It is true that you can repair your credit history and credit score, but it is a long and tedious task which require a lot of time and dedication.
Benefits Of Filing Bankruptcy
If you have so much debt that it will literally take you 5-10 years to pay back the creditors, then you are a good candidate to file for bankruptcy. The simple reason is that the time it takes you to payback the creditors, you are already in danger of ruining your credit report and credit history. If that is the case that your credit report and credit history is inevitably damaged, why not save yourself the headache, and money of course, and file for bankruptcy. Since you will need to find a way to repair your credit, and you can “save” the money that you are planning to use to payback the creditors, it will turn out to be a “win-win” situation for you if you are in such dire financial situation.
Essentially once you have filed for bankruptcy protection, the creditors are legally required to stop hounding you for the repayment of the debt until the ruling of the bankruptcy court. When and if your bankruptcy case has been approved, the debt that you have listed in your bankruptcy petition will be fully discharged, meaning totally wiped out, which means you will never have to pay back the creditors. This is also a good way for you to start out fresh financially without having any debt having over your head.
Is Filing Bankruptcy A Good Idea
Hence we have finally come back to the main topic of this blog piece. Filing bankruptcy can be a good way to get rid of the heavy debt you have put yourself into. But there are definitely situations that filing bankruptcy is not the most ideal solution for your particular situation. Your best option is to talk to a bankruptcy lawyer to get all the pros and cons if you choose to file for bankruptcy protection. Filing bankruptcy is a life changing event and should never be taken lightly. Almost all the bankruptcy lawyers have free initial consultation which will allow you to get all the necessary information you will need. You have nothing to lose by talking to a bankruptcy lawyer to find out what you will be facing whether you are in the pre bankruptcy phase, or the post bankruptcy stage.
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It has become an accepted belief that you will not be able to qualify for a mortgage after you have filed for bankruptcy protection. Many people believes that once you have filed for bankruptcy, your “financial life” is ruined forever. Many believe they will not be able to get a credit card, a loan and needless to say, a mortgage for a house. This is the furthest from the truth. Just because you have filed bankruptcy, you can still have that credit card, that car loan, or a mortgage on the house that you have been eying for years. Getting that mortgage for the house after your financial insolvency will take a little more work, but it is achievable.
The misconception that one will be financially ruined after filing bankruptcy is just not true. In fact, most people who had gone through the Chapter 7 bankruptcy discharge or Chapter 13 bankruptcy discharge are considered by the credit bureaus better risk than those who still have a ton of debt. Given that fact, you will be able to get that credit card offer almost immediately following your bankruptcy filing or discharge. I am the perfect example of this. Not 2 months after filing for bankruptcy, I received an offer from Capital One for an unsecured credit card. Granted, the limit on this card was only $750, but this gives me a chance to rebuild my credit. Having a low credit limit on the credit card definitely reminds me of what got me into trouble initially. I now know how to live within my means and NOT just charge expenses on the credit card because the limit on the credit card allows me to.
In the past, you were probably not worried about your credit history, your credit score, or anything related to your personal finances. This is a major mistake which ultimately brought you into the financial insolvency you have experienced. Now if you are looking to “rebuild” your life, you have to be vigilant about your finances. You will need to look to fix your credit report, rebuild your credit history and monitor your credit score almost religiously in order to put yourself in the position to be eligible for a home mortgage.
Why is it important to fix your credit report?
Part of your identity nowadays is your credit report, therefore you need to have this as accurate as possible. You want to make sure that the Big 3 credit bureaus (Equifax, Trans Union, Experian) are reporting accurately for you. If you see that something in the credit report is not correct, you want to bring it to the attention of the credit bureaus immediately. The creditors might not be reporting as often (if at all) hence your credit report can be skewed (for the worst). Follow the process of the credit bureau in question and look to correct this mistake as soon as possible. Once you are able to remove the incorrect information on your credit report, you are one step closer to having this creditor drop from your credit report in 10 years if you have filed for Chapter 7 bankruptcy. Having an accurate credit report means that you will have eventually have better credit score, and better credit score translates into a better opportunity to get a favorable home mortgage.
Why is it important to rebuild your credit history?
As part of your financial rebuilding efforts, besides fixing your credit report, you should also look to strengthen or rebuild your credit history. Creditors like to see a long history of good credit history, meaning that you use credit responsibly by paying for the credit charges on time and not abusing it. Some people wonder how anyone can rebuild the credit history if they do not have access to any credit cards? If you really do not have any credit cards post bankruptcy filing, then look to get a secured credit card. A secured credit card is one in which you have a prepaid spending limit, and you will never ever be able to spend more than what you have paid for. By using a secured credit card responsibly, credit agencies will see that you have “turned over a new leaf” and will be inclined to give you future credit allowances, which in turn translate into better credit history.
Why is it important to monitor your credit score?
This is the step that I will encourage you to do at least quarterly. If you know at all times what your credit score is, then you will know what makes your credit score go up or down from quarter to quarter. If your credit score continues to rise, that means whatever you are doing is working, and you should continue doing so. If it dips drastically for the quarter, then review what you have done: Did you buy a lot of items and hence tapped into the maximum of your credit limit? Did you continually apply for credit and hence portrayed a habit of excess spending? Try to avoid those activities that can negatively impact your credit score.
You can get a mortgage even if you have filed for bankruptcy protection
If you are thinking of buying a house by obtaining a mortgage, or even conducting any big financial transaction, you will need to take the above mentioned necessary steps to fix your credit report, to rebuild your credit history, and to actively monitor your credit score. Once you are able to achieve all the credit rebuilding process, you should be considered creditworthy for that mortgage or loan that you are looking for. Remember, once you have seek for bankruptcy protection, it does not mean you cannot get any kind of loan anymore. You will just need to work harder at rebuilding your credit to show that you are a reliable and responsible borrower in the eyes of the lenders.
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Inevitably during your lifetime, you are bound to make a mistake or two. This mistake can be small, or it can so big that it can be literally life changing. Little mistakes such as forgetting about your spouse’s birthday can easily be forgiven, but if it is a life changing mistake such as poor judgment for managing your finances can lead to a need to file for bankruptcy protection. As important as this turn of event is, if you had to do over again, it is conceivable that most people will not put their financial health in jeopardy again. So what got you into this financial mess and what do you plan to do post bankruptcy that will help you in the future?
A good percentage of those who had to file for bankruptcy protection got into this sticky situation because of poor financial planning. Poor financial planning can include many scenarios. One such scenario can be if you are buying a house but you really cannot afford it. For example you are taking home $3,000 per month from work, and you ended up buying a house that you will need to pay $2,000 per month. It is literally impossible to live off $1,000 per month, if you are spending 66% of your take home pay on just the house itself. A good rule of thumb is not to spend more than 30% of your income on housing expenses.
Another reason a lot of people ended up filing for bankruptcy protection is when they live outside of their means. This means that they do not watch what they are spending. In the past, it has been so easy to get a credit card that people tend to forget that charging on the credit card does not imply that you do not have to pay for the service or merchandise. Incurring credit charges just prolong the time that you have to pay for the expenses. It is a useful tool to help you purchase that new TV that you have always wanted. But you should also be mindful that you can pay for that the TV in reasonable amount of time. If you really cannot pay for the TV, like most people who had to file for bankruptcy, then refrain from taking out that credit card for this impulsive purchase.
The majority of the people who had to file for bankruptcy tend to abuse their credit cards. Some of these people’s situation even get so dire that they ended up living on the credit cards. It is already bad that they cannot pay for the balances on their credit cards, they would make the situation worst by relying their livelihood on the credit card. Some people would take out cash advance to pay for their daily living expenses such as food. Cash advance is one of the worst financial transaction one can incur in his or her lifetime. Not only is the finance rate on the cash advance astronomical, it is simply total stupidity to be basing your livelihood on cash advance. Some people will justify this action by promising that this is just a one time occurrence. But we all know better, once they get “hooked” on this type of living, they will always justify using cash advance as a way of living.
For those who are thinking of filing bankruptcy, or have filed for bankruptcy recently, here some advice that should adhere to (coming from a person who had gone through this ordeal):
- Live within your means at all cost
- Be religious to follow rule #1 by having a reasonable budget and stick to it
- Find any way you can save money, saving money can only help you in the future, and not hurt you
You Can Bounce Back From Bankruptcy
Remember, filing bankruptcy should bring your much financial relief. It is not a means for you to erase all your debt just to accumulate debt once the bankruptcy process has been finalized. Take this chance given to you and rebuild your life without the massive debt hanging over your shoulders each and every day. Look at this from the positive side at all times, instead of focusing on the negative aspects of filing for bankruptcy. If you are uncertain of what is involve in the bankruptcy filing, seek the advice of a local bankruptcy lawyer near you.
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