This is a guest post submitted by Andrea @ So Over Debt.
Andrea dispels some of the common myths about bankruptcy fears. For those of you have questions regarding bankruptcy, this article is a great start to learn more about its process.
As I browse through reader questions here on SpringCoin and posts on various other financial sites, I notice a lot of people struggling with unemployment, low wages, complicated family situations, and the crippling weight of way too much debt. People face choices they never dreamed they would have to make. Foreclosure rates have skyrocketed and credit card interest rates at 30% are considered “low.” Unfortunately, our current economic reality means circumstances like these have become the new norm.
When times are hard and bills start piling up, many people start thinking about bankruptcy as an escape from financial disaster. Of course, bankruptcy is one of those subjects no one likes to discuss. Americans are taught that success comes from personal responsibility and hard work. Admitting you can’t pay your bills seems to fly in the face of those values. Better to live under a mountain of debt than ever air your financial laundry in public – that’s the attitude our society has developed. It is also one of the reasons we owe so much debt in the first place.
Believe me, I know all about admitting that I can’t pay my bills. In 2006, I filed for Chapter 7 bankruptcy protection after years of too little income, unexpected expenses, and living beyond my means. At the time, bankruptcy was the only option left. I was disgusted, angry, and ashamed of myself for failing to stop the insanity before my life spiraled out of control. In the end, bankruptcy wasn’t nearly as scary as I thought it would be. When people don’t talk openly about something, it takes on mythical proportions, and I believed much of what I heard instead of finding out for myself.
If you’re considering bankruptcy, you are likely stressed to the max. You may not feel comfortable discussing your finances with friends or family. A consultation with an attorney would answer many of your questions, but you may not be ready to take that step just yet. It’s easy to be paralyzed by worry when you are already worried enough.
Here are five common bankruptcy fears that you can let go of today:
Myth #1: The bankruptcy laws have changed and it’s impossible to file now.
The Bankruptcy Reform Act of 2005 did change some of the rules to discourage people from filing. Bankruptcy is supposed to be a last resort, yet some people were filing multiple times or racking up tons of purchases on credit cards right before they filed. Reform did not make filing impossible; it simply improved the process to encourage use by only those who truly need it. You are now required to take a credit counseling course, for example, to encourage better financial choices. You can’t use your credit cards for 90 days prior to filing. In addition, you can’t pick and choose which creditors to include – no hanging on to that Macy’s card just because they have a great summer sale coming up. The changes force filers to complete more steps, but bankruptcy is just as available now as it ever was.
Myth #2: If I file, I’ll have to get rid of all my stuff.
This was one of my biggest worries before I started the process. Was someone going to come into my home and take my computer or furniture away? Would I lose my home and car? You can breathe easy knowing that you can keep everything you own within reason. Every state has a different dollar amount of exemptions you can take for personal items. When I filed, I had to assign a dollar amount to everything in my home – not what I paid for it new, but what I could get at that moment if I listed the items on eBay or had a yard sale. I had a lot of possessions, and I didn’t even come close to meeting Kentucky’s exemption limit. Filers are also able to keep a mortgage for their primary home, as well as a vehicle or two depending on the needs of the household. Now, if you own five cars, tons of expensive jewelry, or an enormous collection of gold bars, you’re probably going to give up some of your stuff. However, it’s been my experience that bankrupt people typically don’t have a bunch of big, expensive possessions lying around.
Myth #3: I’ll never be able to qualify for credit again.
No need to worry – you will definitely be able to get credit following a bankruptcy. However, you will pay a much higher interest rate because you are now an increased risk to lenders. This is why bankruptcy should be used only when there are no other options. For example, I got a job with a long commute in the middle of my bankruptcy and needed a more reliable car. I was able to get one with my attorney’s permission, but I paid 18% interest for the life of the loan, meaning I paid almost $25,000 for a $16,000 used car. Another consideration is whether you need to jump right back into borrowing after financial disaster. Personally, I was eager to “rebuild my credit,” and I ended up back in debt.
Myth #4: Everyone will know I filed. It’s going to ruin my life.
Bankruptcy is public record. In the small town where I live, bankruptcies are listed in the newspaper every week. But you know how many people knew I filed? Very few. Think about it – how many of your friends have filed for bankruptcy? You may not think any of them have, but I would bet that you just aren’t aware of it. According to USCourts.gov, 1.5 million American households filed for bankruptcy protection in 2010 alone. The economic downturn has affected everyone! Generally, the only people who will know about your bankruptcy are the people you choose to tell. You may feel like your finances are exposed for the entire world to see, but surprisingly few people will have a clue.
#5: Bankruptcy means I’m a complete failure.
It’s easy to get discouraged when financial problems have taken over your life. Bankruptcy is embarrassing, but so is having your debit card declined when you’re at a restaurant with coworkers (I know because it happened to me more than once). Before you make the decision to file, make sure you have truly done everything possible to pay off credit cards quickly? Check to see if you can reduce your expenses somehow. If your vehicle payments are eating you alive, consider selling your car and buying something cheaper. Look into opportunities to make more money. Talk to a reputable debt consolidation organization to find out if you can avoid bankruptcy. If you have done those things and still feel bankruptcy is the only way out, you have NOT failed. Sure, you might have made some mistakes along the way, but who hasn’t? The important thing is making changes going forward so you don’t end up in a state of financial crisis ever again.