If you owe more than you own, there is a chance consumer bankruptcy could be of assistance. According to an estimate from the Federal Reserve Bank of New York, this represents around 14% of all U.S. households. Yet fewer than 1% of American households file for bankruptcy each year. Why are there so few, comparatively?
You may be waiting too long to file. The reason may be fear, myths or misplaced optimism. Sometimes, fear and misplaced optimism are caused by anxiety or depression, which can make it harder to take appropriate action.
Have you been avoiding your mail? Are you plagued by collection calls? Have you put off even finding out how much you owe? Have you considered tapping into your 401(k) account to pay off some debt?
These are all signs that you are in over your head. Bankruptcy may be a responsible choice, and it doesn’t mean you will lose everything.
It’s not necessarily a matter of fault
Many people get into financial trouble through no fault of their own. You may have lost a job, especially in the current economy. Going from two incomes to one can make it virtually impossible to pay your mortgage and other bills.
Most people who file for bankruptcy have been doing their best. Many have been paying for years on debts that won’t go down. Many have been responsibly paying their debts until a hardship occurs.
Bankruptcy can be a solid choice for people in your position. It exists to give you a second chance and a fresh start.
You won’t lose all your assets
Many people fear that bankruptcy will mean they lose their home, car and savings. For the vast majority of people, it won’t.
Chapter 7 “liquidation” bankruptcy is available to people who meet certain income thresholds. In most cases, you won’t lose anything because much of your property is exempt from bankruptcy. For example, a portion of your home, a vehicle, your professional tools, your wedding rings and your 401(k) plan are typically exempt from bankruptcy. That means they won’t be taken from you.
If there is a chance you could lose some of your assets, you can file for Chapter 13, the “wage-earner plan.” In Chapter 13, you bundle all your qualifying debts into an affordable, 3-5 year repayment plan. This plan can include debts that wouldn’t be discharged in Chapter 7 and can allow you to continue making payments on your house and car, for example.
Bankruptcy won’t destroy your credit forever
It’s true that a personal bankruptcy can remain on your credit report for as long as 10 years. However, you can typically begin borrowing on credit cards again right away. You will need to do so in order to begin rebuilding your credit score. You can usually get a new mortgage after just four years, if you have rebuilt your credit sufficiently.
Don’t be too optimistic
You may have gone into too much debt because you were too optimistic about your ability to repay the loan. You may have been expecting an increase in your income, an inheritance, or something else that would improve your situation.
If the expected relief hasn’t arrived, you may be in a position where bankruptcy makes financial sense. Moreover, as soon as you file bankruptcy, your creditors must stop contacting you. No more dread about answering the phone or bringing in the mail.
Talk to a bankruptcy attorney. Generally, a case evaluation is free, and you can find out where you stand and how bankruptcy could help you. Get straight answers, not myths.