Bankruptcy is Saving the World

For a lot of people, the term “bankruptcy” refers to a trick: People rack up immense debts they can’t hope to pay back, and when justice begins to close in on them they can jump in the escape pod marked Bankruptcy and wriggle out of the consequences, only to repeat the cycle.  This, of course, isn’t true, and as bankruptcy rates skyrocket during the worldwide economic slowdown we’ve been experiencing, more and more people are realizing that bankruptcy serves a legitimate purpose in the world.  To put it in dramatic terms: Bankruptcy allows civilization to exist, because it gives us rules and structure for dealing with financial ruin.

The Bad Old Days

In the past, an inability to pay bills was dealt with via a destructive and unrealistic hostility.  People were even thrown into jail because they failed to pay their bills, and even where debtor’s prison didn’t exist, there were usually endless rounds of punishments that sank people into a hole they would never crawl out of.  While that might seem like justice to some folks who have smugly never missed a payment in their lives, the fact is it was totally harmful to society: The debtor had no chance not only of paying off that specific debt; they had no chance to pay off other debts either.  Punishment therefore spread like a cancer to all the interested parties.

The Modern Method

In contrast, bankruptcy today allows for an orderly and fair review of the debtor’s assets and debts, and as many debts as possible are made whole.  Lenders are able to negotiate to get at least some minimum amount of their principal back, and the debtor is allowed to rebuild their lives and their finances not only after their debts are discharged, but during the process as well – which benefits everyone.

More and more people are realizing this – more than a million people filed for bankruptcy protections under either Chapter 7 or Chapter 13 in 2012 and 2013.  The two main types of bankruptcy differ slightly in the details of how they work, and a professional should be consulted before making any decisions involving bankruptcy.  But if you are at a point where paying your debts has become impossible, it’s a better choice to alert your creditors and work with them under a legal structure than to deny what’s happening and let chaos rule the day – as it surely will if you don’t file.

 

Bankruptcy Can Save Your Retirement

What most people never seem to understand about their retirement is that it’s never a straight line.  Retirement goals zig and zag, and if you’re going to enjoy your twilight years in comfort and security you have to constantly adjust to keep up.  More importantly if life starts throwing you curveballs before you’re retired, the worst thing you can do is deplete your already-challenging nest egg in order to pay for them.

Increasing Debt

The numbers are depressing: Despite being generally underprepared for retirement already, more and more people are borrowing from their 401ks and IRAs in order to fund healthcare costs, keep home mortgages current, or even to fund school tuitions as they attempt late life career swings after a layoff or downsizing – in fact, Americans over the age of 50 already account for $36 billion in student loan debt.

It’s tempting to draw on your retirement funds to handle these debts and to think about them as “investments in your future” – but it’s a huge mistake for two reasons: One, since you’re essentially borrowing against yourself, these debts can’t be handled with bankruptcy protections, and two, by extension, that means bankruptcy can’t save your retirement from disaster.

The Bankruptcy Option

Bankruptcy has a bad reputation.  But if you run into debt problems later in life when your income is shrinking, bankruptcy becomes your best friend, because your retirement accounts – whether they are 401ks, IRAs, or SEPs – cannot be used to discharge your debts when you’re in bankruptcy.  That means that when you hit bottom with your financial life, bankruptcy can salvage your retirement and ensure you won’t spend the final years of your life trying to make ends meet on Social Security and handouts.

If I file for bankruptcy, will everyone know about it?

Can My Son’s Bankruptcy Harm Me Financially?

Having a family member go through bankruptcy can certainly be a disruptive event for everyone; however, unless your name and social security number are on debts that your son accrued before the bankruptcy, you will not be financially harmed. 

Still, there are some possible problems you might want to consider.  For example, once your son’s bankruptcy is discharged, it will be difficult for him to get credit, qualify for a mortgage or possibly even rent an apartment, so it is highly likely that you, as a concerned parent, will want to accept a request to co-sign.  In this situation, there are definitely some factors to take into consideration that could potentially harm you financially.

When a co-signer is on a loan, the lender will typically file a lawsuit against that person first to recoup money, especially considering that the co-signer is much more likely to have greater financial resources and job stability (which is why they were needed to co-sign in the first place).  This means that should your son’s financial history repeat itself, you will likely be stuck with lawsuits that could be devastating for your credit rating and court judgments that are your responsibility to pay.

Knowing this, if you still decide to co-sign, do so with caution and moderation in mind.  This means that if your son is purchasing a car and you are co-signing for it, be sure that it’s in a lower price range (under $8,000) and over a long enough period of time. This way, should you be forced to take over payments, they will be low and not affect your monthly budget so much.

 

The best way to enter into a co-signing agreement with a family member who has recently gone through a bankruptcy is to consider it a loan you will likely have to repay.  If you think of it that way, you’ll be able to make a much more financially sound decision concerning whether or not you should co-sign in the first place. 

If my husband/wife files for bankruptcy, will I have to file too?

5 Myths About Bankruptcy You Should Know

Image courtesy of graur razvan ionut / freedigitalphotos.net

Despite the plethora of information available online, there are still bankruptcy myths circulating that are just that—myths.  With something as important as bankruptcy, it’s important to understand the facts and learn how to distinguish them from fiction.  

1.       Everyone will know I’ve filed.

While it is true that bankruptcy is a public record and is searchable as such, unless you are a high-profile individual, it is unlikely that anyone in your circles will know that you’ve filed for bankruptcy.  The number of people who file each month in any given city or area often makes it impossible for the media to focus on printing names; although in some smaller communities, the newspapers still do this.

2.       If I file Chapter 7, I don’t have to pay back any of my debts.

This is certainly a nice thought but it’s a myth, nonetheless.  Certain debts such as alimony, child support, student loans and fines for criminal acts must still be paid, even after filing for Chapter 7.

3.       If I file bankruptcy, I’ll lose my house, car, possessions, etc.

It is important to know that each state provides exemptions to bankruptcy filers, allowing them to keep a considerable amount of their property—up to a particular value.  A bankruptcy attorney will be able to explain in detail what you may or may not lose in the process of filing. 

4.       I can kiss credit goodbye if I file. 

Although for 2-4 years, you might only qualify for subprime loans, there are still many lenders who are more than happy to provide credit to people who have filed for bankruptcy—even Chapter 7 bankruptcy. 

5.       If my husband/wife files, that means I have to file, too. 

This situation is highly dependent on whether both spouses are liable for the debt.  If both names are on most debt, then yes, it would make more sense for both spouses to file.  However, if only one spouse’s name is on a considerable amount of debt, that spouse can file, leaving the other spouse’s credit unscathed.  

5 Steps To Recovering From A Bankruptcy

Image courtesy of  Stuart Miles / freedigitalphotos.net

Once your bankruptcy is completed, you have a unique opportunity that not many people get—the opportunity for a fresh financial start.  The best way to use this opportunity to your advantage is to make the right financial choices from this point forward.

1. Create a budget and stick with it.

Making a livable budget is the first (and most important step) to getting back on track financially after a Chapter 7 or Chapter 13 bankruptcy.  Showing your potential lenders that you have learned your lesson and are able to make smart financial choices is best done through living within your means and knowing where your money is going at all times.

2. Learn to live on cash (or your debit card) again.

After a bankruptcy, cash is your friend.  Not only does cash allow you to stick to your budget better (since it’s a tangible reminder of how much you have to spend each month), it also helps you get out of the credit habit.  This doesn’t mean that you should avoid credit entirely, though—in fact, you’ll need to re-establish some credit in order to get your credit score back on track after the hit it takes from bankruptcy. 

3. Pay your bills on time, every month.

Keep in mind that even the small bills will show up on your credit report and affect your score. 

4. Keep a close eye on your credit report.

The only way to ensure that your credit is getting back on track is to watch it closely.  A good way to do this is to sign up for a credit monitoring service. 

5. Get a credit card and use it wisely. 

The only way to re-establish your credit is to obtain credit and use it wisely.  While it might be difficult to obtain credit initially after your bankruptcy has been discharged, many cards offer low credit lines to people with poor credit with the opportunity to raise those credit lines after demonstrating over a period of a few months that it will be used wisely.