Have you gotten into so much trouble with your debts that you’re considering filing for a chapter 7 bankruptcy? This may not make you feel any better but if you do file you won’t be alone. According to Business Insider some of America’s richest and most famous people have declared bankruptcy including actress Kim Basinger, rapper MC Hammer, director Francis Ford Coppola and talk show host Larry King.
It can be a fresh start
A lot of people declare bankruptcy every year. In fact, according to the US Courts a total of 884,956 people filed for bankruptcy last year.
There’s no question but that there’s a certain stigma attached to having a bankruptcy. But it does provide people with a fresh start – especially those whose biggest problems are unsecured debts like credit card debts, medical debts and loans used for things such as debt consolidation.
A lot of myths have sprung up about bankruptcy. And there are six you need to know about that are totally untrue.
Bankruptcy will get rid of all your debts
If you’re thinking of filing for bankruptcy because it will discharge (get rid of) all of your debts, you need to think again. If your problem with debt has to do with a domestic support obligation such as alimony, child support or family support, a chapter 7 bankruptcy will not discharge it.
An act passed in 2005 titled the Bankruptcy Abuse Prevention and Consumer Protection Act allows private student loans to be discharged in a chapter 7 bankruptcy but not federal student loans.
And secured loans like mortgages and auto loans and any other type of loan where you were required to provide an asset as collateral also cannot be discharged in a chapter 7 bankruptcy.
The people who file for a chapter 7 bankruptcy are irresponsible financially
Of course, some people who filed for bankruptcy were financially irresponsible because there can be abuse but there are three what you might call “good” reasons for declaring bankruptcy.
The Bureau of Labor Statistics has reported that that one in 10 unemployed Americans have been jobless for 99 weeks or longer. Couple this with the increasingly high cost of medical care and with the expenses associated with running two households after a divorce and it becomes clear why so many people filed for divorce – that had nothing to do with irresponsible spending.
You can spend recklessly before your bankruptcy and won’t have to pay back the money
A third common myth about bankruptcy is that you can charge up your credit cards just before you file and those debts will be discharged.
If you do this, you could actually end up in trouble. This is because our courts have ruled that this is considered fraud and any debts that you incur because of fraud cannot be discharged. What this means is that if you charge up a bunch of purchases just before you file for bankruptcy, you probably won’t be able to get away with it.
If you file for bankruptcy you may be shocked at how fast you’ll start getting offers for credit cards in the mail again. However, those that start arriving within a month after your debts have been discharged will be offers for secured credit cards. These cards require you to make a deposit with the bank and will have a very low limit. It’s actually a good idea to get one of these cards and then start making your payments regularly and on time. This would help you rebuild your credit.
Assuming you use that card sensibly then after 6 to 12 months you should be able to get new credit in the form of a regular credit card and drop the secured card. Of course, if you make late payments this will do nothing to improve your credit score.
Once all of your debts have been discharged it’s a good idea to check your credit reports to make sure that everything that was discharged in your bankruptcy was marked as discharged. In addition, author Lita Epstein who wrote The Complete Idiot’s Guide to Personal Bankruptcy has said that she’s seen people who were able to qualify for a mortgage within just two or three years after their bankruptcies – depending on their circumstances.
It’s a cure-all
There are two types of a personal bankruptcy. They are a chapter 7 and a chapter 13. As you have read, chapter 7 will discharge certain of your unsecured debts while a chapter 13 is to reorganize and reduce your debts. However, neither one of these offers an easy solution.
Don’t know whether you should file for a chapter 7 or a chapter 13 bankruptcy? Watch this video to learn the differences between the two.
A mistake many people make is believing that bankruptcy will solve all of their problems. If you file for a chapter 7 bankruptcy you could actually lose some of your property. The reason for this is because the bankruptcy referee is required to sell off whatever of your property he or she can to repay your unsecured creditors. This includes things such as a second car; a recreational vehicle; coin, stamp and any other valuable collection; and even stocks and bond certificates.
You can only file for bankruptcy once
You can actually file for a second bankruptcy but when you can do it will depend on whether you filed for a chapter 7 or a chapter 13 and the amount of time that has passed since your first bankruptcy.
If you filed for a chapter 13 bankruptcy and got a discharge, you would actually be eligible to file another chapter 13 bankruptcy in just two years. If you filed for a chapter 7 bankruptcy and got a discharge you would be eligible to file for another one in eight years.
Of course, we hope that you never have to file for another bankruptcy as going through one can be emotionally trying. Joseph Goetz, who is president of the Financial Therapy Association, has noted that going through a bankruptcy can be psychologically difficult, cause a lot of stress on relationships and even be traumatic for the entire family.