When I started as a bankruptcy paralegal several years ago I went into the job with preconceived notions about bankruptcy, the people who file, and how it affects credit. It didn’t take long to realize that my perceptions were way off base. I want to share some of that knowledge with you here so that perhaps we can change the tide in how people think about bankruptcy. I’ll start by sharing information that I thought was true, then explaining what really happens.
1. Bankruptcy is a terrible choice for anyone to make. This remark is almost laughable to me now after seeing thousands of people turn their lives around with bankruptcy. The truth of the matter is that in some situations filing bankruptcy is the best decision a person can make. By going bankrupt an individual with overwhelming debt can find a financial fresh start in less than 1 year.
2. Bankruptcy is only for people with very low incomes. Again I can’t believe I ever thought this was true; maybe someone should have just mentioned 2 little words: Donald Trump. That’s right, the multi-billionaire has filed bankruptcy on his many hotels and casinos numerous times! He may be a hard guy to relate to financially, but it proves a point: even people who many may consider “wealthy” sometimes have to file bankruptcy in order to get their finances in order. In many cases individuals and couples with very high incomes file what is known as a Chapter 13 bankruptcy which consists of a 3-5 year repayment plan where the court allows them to pay back a percentage of their total debt. This is in contrast to a Chapter 7 bankruptcy that in most cases is used for those individuals or couples with low incomes and very little assets.
3. Bankruptcy will ruin your credit forever. This is a common misconception that I really think scares people away from ever considering the help that bankruptcy may give to them. Allow me to explain the truth about what really happens to your credit when you file bankruptcy. When an individual files bankruptcy all of their creditors are notified via US Mail by the bankruptcy court. The creditors then notify the credit bureaus that the specific accounts are under “bankruptcy”. Once the bankruptcy is complete and the debts are erased, the bankruptcy court again notifies the creditors of the progress. Again the creditors notify the credit bureaus that the account balance is $0.00 and the account is marked with “bankruptcy”. The mark of bankruptcy will stay on an individuals credit report for 7-10 years depending on the chapter of bankruptcy that was filed, but that mark doesn’t stop the debtor from rebuilding credit, owning a home, or financing a vehicle.
Don’t believe everything you hear when it comes to bankruptcy. Find advice you can trust whether it be from a friend or family member who has filed bankruptcy before or a local bankruptcy attorney.