Thinking of filing for bankruptcy?
There are periods when debt obligations weight you down and everything else in life stands still.
And therefore, to get a new lease of life to your finances, the need to find radical solutions to make things right becomes paramount.
That is the point when you might want to consider filing for bankruptcy. What a scary proposition these days!
But actually, bankruptcy is nothing to be afraid of; not fixing your financial problems is! And, filing for bankruptcy is sometimes the only solution to stay afloat financially.
And there is no perfect time for filing for one, especially if you can’t get the idea out of your head. Speaking with a lawyer or a financial planner for more clarification may also be helpful.
What is bankruptcy?
Bankruptcy is a special legal process you can take to relieve yourself of debt burden. The process can reduce or eliminate your debts and you get another chance to reorganize your finances.
Bankruptcy is not a moral decision. It is a legal choice made when the debt situation is depressing.
In itself, bankruptcy can be the right answer to your stormy financial period. However, there are instances when the desired outcome does not materialize. And, the after-effects turn out to be more damaging than you anticipated.
Filing bankruptcy with a court is the first step. You can file on your own or you can file with an attorney.
Bankruptcy costs include attorney fees and filing fees. Even if you file on your own, you will still be responsible for filing fees.
So, how much do you know concerning the topic of bankruptcy?
There are lots of guides, out there that can help you navigate the first few steps in the filing process.
However, there are some things you need to know before you start filing for bankruptcy.
I am certainly not recommending bankruptcy as a casual solution. However, if you’ve decided to move ahead with bankruptcy then here are some good bits of advice.
Here are the 9 facts you need to be aware of before deciding to file for bankruptcy
1. When you filing for bankruptcy, it doesn’t mean you are broke
Bankruptcy is often mashed up with being broke. It is not so in as much as the line separating the two is very thin.
One can be declared bankrupt but they still can afford a life of luxury. How come?
To be declared bankrupt means you can no longer meet your debt obligations and you want another lease of life. But by no means does this reflect your financial well-being.
In simple terms, bankrupt means you might be having some money with you. But, it is not anywhere close to meeting your debt obligations and feed your family at the same time.
Imagine having borrowed $1 billion to build a luxury hotel which was brought down by a natural disaster. If your net worth is $100 million, there is no way you can repay such a loan within the stipulated timelines.
Therefore, you will have to file for bankruptcy discharge to free you from that debt.
You will still have your $100 million, $0 debt and no dream luxury hotel.
2. Bankruptcy discharge only protects one person
Filing bankruptcy protects you alone and not any other person associated with you.
This makes bankruptcy a personal thing. It only discharges you from the debt obligation but the whole debt remains in place.
If it is a co-owned a business, you successfully filing for bankruptcy does not free the other party from debt obligations.
You will go scot-free and they will have to foot in for the debt unless they too successfully file for one.
3. It takes years to successfully file for bankruptcy
While bankruptcy can be beneficial in times of financial distress, filing is far from easy. The process can put you at a financial disadvantage in several ways.
Unlike normal claims, the bankruptcy filing process takes longer. You should, therefore, be ready to wait until the final judgment is made by the court of law.
Also, be prepared to foot in attorney’s fee for that period and all court injunctions.
But, for individual cases, it is a fairly simple process. The decision might take a few months to be arrived at.
But for companies, it takes up to 3 to 6 years or even longer. And, this is if the debtor or those claiming the debt do not challenge the case prolonging the whole process.
4. Filing for bankruptcy opens your finances to the public eye
Bankruptcy records are public records.
If you are the type to keep your life private, then you are unlucky with the process of bankruptcy.
To get automatic stay protection, you are required to file lengthy papers stating your assets, property, debts, income sources & amounts, expenses and all financial transactions.
If you are uncomfortable with friends, acquaintances, competitors knowing your salary, what you have and what you bought in the last few months, bankruptcy is definitely not for you.
In fact, many people find bankruptcy schedules to be embarrassing.
You will also be required to attend a meeting of creditors in public where you’ll be asked very probing questions.
In as much as creditors will try to keep it as dignified as possible, some questions might be more personal. Therefore, be prepared to wash your financial dirt in public.
5. It might not eliminate all your debt obligations
The main reason for filing bankruptcy is to obtain a discharge order. The discharge order stops debtors from trying to obtain their money from you.
However, there are instances when this does not happen.
Even after filing for bankruptcy, some of the debtors will still pursue you to claim their dues.
This means you have a partial dischargeability as opposed to full dischargeability. And therefore, bankruptcy has not eliminated all the debt obligations.
Here are the instances when such happens:
Reason #1: Tax obligation
You will still need to pay all your taxes regardless of the bankruptcy status. It does not stop you from fulfilling your tax obligations.
Reason #2: Bankruptcy code
There are instances when the bankruptcy code does not discharge some type of debts under certain conditions.
Reason #3: Court’s decision
Courts might decide to offer you partial dischargeability and not a full one.
Reason #4: It is challenged
Your lender might challenge your bankruptcy claim based on the evidence they have. And the court might compel you to pay that particular lender while still upholding your dischargeability status.
Reason #5: Family obligations
You’ll still be required to cater for your child and spouse support irrespective of your financial situation after bankruptcy.
Reason #6: Student loan
You will still be required to pay your student loan even after filing for bankruptcy.
However, it is wise to consult your attorney and explore the possibility of getting discharged from the student loan debt.
6. Honest and total disclosure of your wealth is demanded
When filing bankruptcy, honesty, and total disclosure is required.
You’ll be required to provide complete information. Including your income, wealth, any debts, assets or businesses you own and co-own. Withholding any bit of information will result in you being denied discharge.
In the case you attempt to hide information or lie, the discharge can be revoked and all debtors claim their money. You might even be considered fraudulent?
Fraud is a serious issue and can prevent debts from being discharged in bankruptcy proceedings. It can also potentially lead to criminal charges. You risk being investigated for breaching the law and get a prosecution and hefty penalties.
7. The bankruptcy filing process is more complex than filing tax
If you feel filing for taxes is complex and tiresome then filing for bankruptcy will tear you apart.
Many people perceive the process to be simple and straight forward. Like you just get an attorney, file a few papers before a judge, state your case and bingo! You have your bankruptcy approved.
It is nothing like that.
You will have to fill in a lot of papers by yourself. Therefore, you need enough time to digest what the papers mean before you start filling. Also, you can seek the help of an attorney to help interpret where you don’t understand well.
You should remember that, if you miss to state something or you get something wrong, you risk being denied a discharge and your case thrown out. Or even face other penalties. You will be viewed to be trying to be fraudulent.
8. Filing for bankruptcy may leave you poorer
Bankruptcy isn’t free!
Have you ever heard that someone is too broke to file for bankruptcy? It happens sometimes.
Bankruptcy filing process as I said earlier is long and tiresome. It is also financially demanding in itself.
The sarcasm here is that even filing to declare that you cannot repay your debt still requires you to pay for it.
The little you have will go towards attorney’s fee and paper works. One of the biggest costs of filing for bankruptcy is hiring a lawyer and most lawyers bill by the hour. This means that costs are likely to add up quickly if your particular case is complex.
Also, when you file for bankruptcy, your credit score is affected badly. No one will be willing to lend money to someone who recently shielded themselves using the law against all debts.
As a result, when filing for bankruptcy, you have to look beyond today and come to the conclusion that the opportunity cost of doing it will be greater.
You will have to factor in if you will need a mortgage soon, student loan refinancing, or any other life obligation that will require you borrow soon.
You will need to change how you approach the management of your finances. If you don’t learn to manage your money well, being a rational spender and live within your means, it won’t be long before you see the need for another bankruptcy. And chances are high you may not succeed in the second attempt.
9. It can hurt your credit score for years to come
Bankruptcy carries the a negative impact you can have on your credit score.
Filing for bankruptcy helps and hurts you in the same measure in different ways.
In as much as it relieves you of the debt obligation, it will hurt your credit score for years to come.
Depending on the type of bankruptcy you are filing for, it will affect your ability to obtain loans or gain access to credit for up to a decade. During those 10 years, its effect on your credit score is to depress it. This is something you should consider especially if you plan to maybe purchase a home, start a business or finance educational costs within the next 10 years.
However, if you previously had a healthy credit score, the effect of bankruptcy on your credit rating might not be dire.
Many factors go into calculating your credit score. Different credit rating bureaus give preference to different factors. However, bankruptcy is not among the major ones. But, it still makes creditors grin on your report.
If your credit rating is low, you should explore other options to settle your debt obligations.
A bankruptcy discharge might not be the best for you.
It should be your weapon of the last resort because your credit score will nose dive after a bankruptcy. And, creditors will be very unwilling to give you more money, especially since you already are a high-risk individual.
Nevertheless, you can heal if you take the right steps towards recovery in the post-bankruptcy period.
You can file for bankruptcy on your own without an attorney. The law allows you to do so. You can go this route if you know and understand what you are doing.
However, consultation services for bankruptcy lawyers are free. Therefore, start by exploring your options using one of them before making any decision.