Even though I often come in contact with people who think otherwise, there is no shame in seeking bankruptcy protection.
Most people who feel shame about filing for bankruptcy tend to fall into one of two camps. The first consists of people who are overwhelmed by debt but, for various reasons, wait months and even years before seeking help. They are often embarrassed about their finances and worried about the effects bankruptcy might have on their credit rating and other aspects of their lives. The second group is made up of people whose finances are also in bad shape, but believe that filing bankruptcy is a violation of some higher moral code. Both viewpoints, I believe, are based on misconceptions about bankruptcy, its effects, and its purpose
No matter which camp a person falls into, they tend to reiterate one of three common bankruptcy misconceptions:
- bankruptcy ruins a person’s credit rating (myth);
- bankruptcy destroys a person’s reputation (myth); or
- bankruptcy constitutes some sort of “legal theft” (myth).
Let’s address each of these misconceptions in more detail.
Misconception 1: Bankruptcy will ruin my credit
While it is true that a bankruptcy will almost always have a negative impact on a person’s credit, it is not true that the credit will be “ruined”.
A bankruptcy filing appears on the public records section of a credit report for either 7 or 10 years depending on the type of bankruptcy case that gets filed. The appearance of a bankruptcy on a credit report may alert creditors that you are a higher credit risk, but I find that many of my clients begin receiving credit offers within months of completing their bankruptcy case. This is partly because the new creditors know that they are now at the front of the line when it comes to getting paid; most if not all of the client’s other debts have been wiped out in bankruptcy. The new credit offers will probably not be spectacular, especially immediately after completing a bankruptcy. Nonetheless, even low limit or secured credit cards provide a great way for rebuilding credit. Over time, a credit report will show not only the bankruptcy, but also an account or two that has a manageable balance and that is being paid on time. Over time, a credit score that has been impacted by bankruptcy will begin to rise again, and the bankruptcy will eventually fall off altogether.
Misconception 2: Bankruptcy will destroy my reputation
Filing for bankruptcy protection can have wide ranging effects, but rarely does it lead to the destruction of someone’s reputation. In fact, filing for bankruptcy relief usually indicates that a person is taking affirmative steps to clean up their finances and move toward a fresh financial start.
Although a bankruptcy filing is a public record, not everyone has to know that a case has been filed. Notice that a case has been filed is generally limited to creditors and people who will be involved in the case including the court and bankruptcy trustee. An employer may be notified of the case, but usually only if the bankruptcy trustee in a chapter 13 case requires the trustee payment to be paid through a bankruptcy wage order directed to the employer’s human resources or payroll department. In most other cases, no one else has to know that a bankruptcy case has been filed. Bankruptcy law also provides specific protections against discrimination based solely on a bankruptcy filing.
Misconception 3: Bankruptcy is really just legal theft
Though not an exact definition, theft can be thought of as taking something without paying for it. Some people believe that bankruptcy is just a form of legal theft because it allows a person to avoid paying for goods and services that have been acquired on credit. This belief is wrong at best and degrading at worst. True theft usually involves a level of intent: taking something and intending never to pay for it, for example.
Most bankruptcies are not the result of a person who has run up their credit cards never intending to make any payments. On the contrary, most cases occur after a person legitimately utilizes the credit that has been extended to them by their creditors. Eventually the balances build up, and with astronomical interest rates, monthly payments become a crushing burden. Would it have been better to avoid using the credit cards in the first place? Probably, but many people do not have that luxury, especially when unexpected expenses hit, like car repairs, a visit to the emergency room, and the like. Many people–and even corporations like American Airlines, Chrysler, and Twin River casino in Rhode Island–have utilized bankruptcy to clean up their finances and move forward.
I am always happy to provide a free, no-obligation consultation to review your situation, determine if bankruptcy is right for you, and explain the fees involved.
To schedule a free consultation,