You Should Never File Bankruptcy

You know what it feels like to cringe when the phone rings. You stare at it, willing it not to be a bill collector. Let it be someone who is offering you a job, you pray. You pick up the phone gently, hoping, praying, but no, it’s another creditor. “I’m sorry, I’m not working right now. I’ll…I’ll try to get you a payment as soon as I can.” You hang up and cry, glancing at the past due notices and wondering again about the ad you saw on TV. Bankruptcy. The very idea makes you shudder, but you think to yourself, what choice do I have? I have to declare bankruptcy or I’ll lose everything. It’s at that moment that you need to take a step back and think. Ask yourself, is this really the best choice?

Bankruptcy is a drastic response to a situation that can be managed if you know where to turn. While it might be tempting to declare bankruptcy and walk away from all your debts, there are a lot of good reasons why you should never declare bankruptcy.

Did you know for instance that a bankruptcy stays on your credit record for ten years? And it’s not just that the bankruptcy is listed; it’s that it affects virtually every aspect of your life. These days, your credit report will be pulled for a wide variety of reasons, from getting a car loan to getting a job to getting a bank account. Having that bankruptcy listed on your report will make you look like a terrible risk for years to come. People will wonder if they can trust you. Will you just walk away from your responsibilities, like you walked away from your debts?

Bankruptcy also has other negative aspects to it. In a bankruptcy, you are required to list every asset you own. Your grandmother’s fine china, which she left you for special occasions? It’s fair game for a bankruptcy court to seize it and sell it at auction in order to pay your debts. Your car is likewise vulnerable. In fact, the only things you are allowed to keep in a bankruptcy are the essentials. You will not be left without a bed to sleep on, but anything which is a luxury item (i.e. beyond the basic necessities of life) is fair game and can be seized and sold to pay your debts. Mind you, we’re not saying it will happen, just that it could happen.

In many states, bankruptcy can also affect your home. If you own your own home and have equity in it which you’ve built up over the years, it can be seized and you could be forced to live in a rented apartment. That is, you would live in a rented apartment if you could get one. However, with a bankruptcy looming, no landlord is likely to rent to you, leaving you dependent on cheap motels or the kindness of friends and family. While there are some states (famously, Florida) which do allow you to stay in your home even when you declare bankruptcy, many of them will (reluctantly) force you and your family to leave because the home must be sold to pay your debts.

Finally, there is a certain irony to the bankruptcy code today. It used to be that you could simply declare bankruptcy and start over again with your life. You would wipe the slate clean and never worry about your debts. Sure, you’d lose everything which wasn’t a luxury, but at least you’d have your life back.

However, President Bush signed a bill into law during his first term in office which changed the rules for bankruptcy. In a cruel irony, it became much more difficult for you to simply declare bankruptcy and walk away. Instead, everyone is now required to attempt debt counseling and to investigate chapter 13 of the bankruptcy code, which provides for you to arrange for debt repayment. In essence, what this means is that the moment you declare bankruptcy, you may end up being required to pay off your debts anyway, while still having a bankruptcy listed on your record.

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