Common Misconceptions of Bankruptcy

RyanD
August 29, 2013

If you find yourself in a difficult financial position the thought of declaring bankruptcy has probably crossed your mind a few times. It is important to meet with a bankruptcy lawyer to discuss your situation and the possible outcomes if you do file for bankruptcy. There are approximately 1.25 million Americans that declare bankruptcy each year. There is still a lot of confusion about bankruptcy. Here are some clarifications about bankruptcy and what situations might work best for your financial woes.

Bankruptcy Is Filed Due To Credit Card Debt

While bankruptcy can be pursued by people who deal with a lot of credit card debt, not all cases are related to a person’s financial irresponsibility. Most people that file for bankruptcy do so because of medical expenses, job loss, and divorce. When going through a difficult divorce people will need to pay expensive legal fees. These costs can be overwhelming.

The costs of having to pay for two households, especially if you have to pay support costs, can often make it hard to make ends meet. If you have an illness or medical costs that have accumulated, it is wise first to work with the medical provider before considering bankruptcy.

Bankruptcy Exonerates You of All Debt

If you have racked up hundreds of thousands of dollars in debt, you might think bankruptcy is the answer to get rid of debt. What you will quickly learn is that bankruptcy does not get rid of all the debt you have accumulated. Child support, restitution, and alimony payments are two of the debts that are not discharged by bankruptcy. The type of bankruptcy you select will also determine if you have to pay back some of your creditors.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed the rules pertaining to different debts that cannot be discharged. Many people find that student loan debts cannot be discharged, and tax debts are also difficult to have removed when filing bankruptcy.

Your Credit Is Permanently Ruined From Bankruptcy

Individuals that take the route of declaring bankruptcy will take a hit on their credit rating. However, strong financial discipline can help you repair your credit rating. Bankruptcy will remain on your credit report for seven years if you declare Chapter 13 bankruptcy and 10 years for Chapter 7 bankruptcy. With strong financial discipline, you may start to qualify for a number of credit cards and lending options. You will be considered a sub-prime lender, which means you will usually get higher interest rates and lower lines of credit. If you fall back into the bad habits of failing to pay your bills on time, you can continue to damage your credit rating, making it difficult to get a loan.

However, you can obtain a loan in about 2-3 years if you focus on solid credit rebuilding. Establish a savings account with at least six months of your salary in the account to show financial control to lenders. This can improve your ability to qualify for a loan. Start repairing your credit with a secured credit card. Once you show you can control your spending, you can move into a traditional credit card in about 12 months after declaring bankruptcy.

This article was provided by Sandy Wallace, aspiring lawyer and finance guru. If you’re at a financial low-point and are looking for bankruptcy alternatives, Sandy suggests the services Weintraub & Selth.