Is Filing Bankruptcy Bad?

Many people who come to see me are often nervous and eager to find out if filing for bankruptcy is bad. The word bankruptcy in our society often follows a negative consensus. Whenever I tell people that I am a bankruptcy attorney they assume that people rack up debt and are broke for no reason. This often is not the typical bankruptcy client that I see. Most often my bankruptcy clients consist of people dealing with financial issues ranging from loss of employment, business failure, divorce, and medical issues. While it is true that bankruptcy does mean that the person is financially struggling the reason why someone may find themselves filing bankruptcy is much more common than people think.

Many people say that filing for bankruptcy is bad because they do not know the process. Many fail to understand that why people file for bankruptcy are not always the same reasons. Also, many assume that when you file for bankruptcy you will never be able to have credit again and will be financially ruined for life. This is just simply not true and anyone who says that is uneducated on the process of bankruptcy. I can tell you that filing bankruptcy will not stop you from getting a mortgage again in the future, buying a car, or having credit cards. Many people don’t know that within two years of filing bankruptcy you can have perfect credit again as long as you take the proper steps to rebuild your credit.

Why Do People File For Bankruptcy?

People who file for bankruptcy are simply not able to pay their bills. I’m sure this is common sense but some people believe that people rack up debt carelessly knowing they won’t be able to pay their bills back. Although, in some cases that may be true, for most bankruptcy clients that is not the case. In cases like this of course, bankruptcy is bad. Especially, if the debtor can pay their bills and simply chooses not too. This would obviously be beating the system. But as mentioned earlier, what about the people who have gone through thousands of dollars in medical bills and can’t afford to live or the families that have faced death and the primary wage earner is now gone? What about the families who are going through a divorce and the spouse who earns little money is now liable for their ex-spouses bills? What about the people who have faced addiction and are now starting over and trying to get back on their feet? In these cases, bankruptcy can help tremendously. Bankruptcy can help people in any of these situations get back on their feet by allowing them to start over.

Many people who say that filing bankruptcy is bad probably has never experienced one of the situations mentioned above. Unfortunately, life throws people curveballs all the time and there is no way to really avoid certain things that happen in life.

Why Do People Think Filing For Bankruptcy is Bad?

Filing for bankruptcy has a bad reputation because people believe it damages your credit. Although, it can happen for a few people I have seen many instances where people’s credit actually goes up when they file for bankruptcy. The reason is that when they file for bankruptcy they now do not have any debt. The credit bureaus calculate credit scores by looking at debt to income ratio. After filing bankruptcy you are usually left with no debt thus, no disposable income to pay bills.

Many people are worried that filing for bankruptcy means that they will not have credit while it shows up on their credit report. Although it stays on your credit report for 10 years this does NOT mean that you won’t have credit for the full 10 years. Further, if you already have judgments, late payments, and large amounts of debt in collections than your credit score is probably already damaged. Many people try to go into debt settlement plans thinking that this will be better than filing for bankruptcy. This, however, is usually not the best idea. It is important to understand, debt settlement companies usually want you to pay 40-80% of the balance more or less. If you have $25,000 dollars in debt and you have 10 credit cards but only make $30,000 a year it can take years to pay off this debt. This means that your credit score will continue to keep going down. Also, let’s not forget that many of these cards may accumulate interest. This means that your balance will continue to increase over time and you probably won’t be able to put any money aside for savings while you’re paying off this debt. The worst part is, that if any hardship comes up along the way like you lose your job or get sick you end up right back in the same position. Filing for bankruptcy, on the other hand, allows your debts to be discharged. This will allow you to be able to start building your credit and putting money aside for savings immediately.

Whether filing for bankruptcy is bad really depends on your own financial situation. If you can’t pay your debt and will keep digging yourself deeper into a hole then it really is not bad. How can someone say that filing for bankruptcy is bad when they are getting charged high interest and choosing between making a mortgage/rent payment vs paying their credit cards?

When Is Bankruptcy Good?

There is no answer as to when bankruptcy is good or bad. In order to determine if bankruptcy is right for you then you need to look at your situation as a whole and determine what is best for you. Bankruptcy allows the honest but, unfortunate debtor to be able to start fresh. I have seen hundreds of bankruptcy clients over the last few years and many are relieved after filing for bankruptcy because they have no debt. There is no right or wrong answer as to whether bankruptcy is good or bad for someone. In order to be able to answer that question, you need to evaluate your situation. There are many bankruptcy lawyers that can help you determine whether filing bankruptcy is a bad idea for you. A good bankruptcy lawyer will be able to sit with you and determine whether they think you should file for bankruptcy.

Should Filing Bankruptcy Be The Last Resort?

People who file for bankruptcy usually try to go through other options before filing. Although, that may seem like the right thing to do delaying filing for bankruptcy can also cause unnecessary financial strain and physical stress. Sometimes before filing for bankruptcy people will try to enter into debt consolidation plans, cash out their retirement funds or pay debt settlement companies to settle the debt. Although, it may seem like you should try these options before filing for bankruptcy you may end up in a worse financial situation.

Using your Retirement Funds to Pay Debt

Using your retirement funds to pay off debt is usually a bad idea. What people fail to realize is that if they had filed for bankruptcy they could have discharged their debts and kept their retirement funds without the bankruptcy court making them give their retirement funds up. Many IRAs and 401(k)s are completely exempt from bankruptcy. If you are thinking about using any of your retirement funds to pay off your debts you really should speak to a bankruptcy lawyer first. With the cost of elderly care rising I would advise not touching all of your life savings before speaking with a bankruptcy lawyer.

Debt Settlement:

Many Debt settlement companies make promises that they can rarely deliver. Many will tell you that filing for bankruptcy is bad and that you will be able to pay these debts off in no time. What people fail to understand is that debt settlement companies are not regulated. As long as they are getting their money they really do not care if your debts are paid or not. They often charge fees that are much more than what it would cost to file bankruptcy. They also require that their clients go deep into default in order to settle their debts. The process of debt settlement begins by you not paying any of your credit card accounts and instead save that money for them to make settlements with the companies. When your deep in default, the creditor may accept a reduced payment. The problem that arises is that as your putting money into these accounts to make settlements the credit card companies are not waiting for you to have all the money. This means that they will start using to collect the money. During this time they are also reporting delinquencies on your credit and harassing you for payment. Further, once they begin to sue you and get a judgment your wages will be eligible to be garnished or they can place a levy on you. Filing for bankruptcy will stop all of these things before they happen. Although there are downfalls to this if you do not have the money to pay your creditors for some, it can be the opposite if you already have the money saved then you can immediately make settlements with each company before they have a chance to begin using you.

Another thing that must be considered when you do debt settlement that many debt relief companies fail to tell you is that you will be taxed for the forgiven amount at the end of the year. This means that when you do your taxes the amount that the credit card company forgave will be looked at as income. For example, if you have a credit card with a $20,000 balance and the debt company settles the card for $10,000 you will have an extra $10,000 of income.

It is best to hire a lawyer that practices bankruptcy law and does debt settlements. A bankruptcy lawyer can determine if settling your debt is the right option or filing a bankruptcy would be better in your circumstances. A debt settlement lawyer has experience negotiating settlements and is regulated by the American Bar Association. This means that they won’t be able to just charge high fees without doing the necessary work. Unlike, debt settlement companies that are unregulated. Our bankruptcy attorneys are here to assist you with this process. 

If you are considering filing bankruptcy or considering debt settlement it is important to speak with an experienced bankruptcy lawyer that can help you. Contact Karra L. Kingston today for a free consultation.