Filing for personal bankruptcy is often seen as an easy way out for individuals whose liabilities greatly outweigh their assets. In fact, even before the global financial meltdown began in 2008, personal bankruptcies in the U.S. had been steadily growing throughout the last 10 years. The meltdown only made things worse. Yet it may not always be the right decision for every individual. Declaring bankruptcy has just as many negative points as it does positive ones.
According to the experts, personal bankruptcy should always be the last resort rather than the first one. Individuals facing severe financial pressures should sit down and carefully assess where they are financially and what their future holds. Some of the questions you need to ask yourself before going down this road include:
- Are my debts and dischargeable?
- Will the cost of bankruptcy outweigh the benefits?
- Will personal bankruptcy affect my work?
- How will a bankruptcy affect the future of my children?
- What are the different types of personal bankruptcy, and how does each one apply in my case?
Dischargeable Debts
Most individuals just starting the process of personal bankruptcy have no idea that not every debt is dischargeable. In other words, there are some debts you will still be required to pay by the court even if you're granted bankruptcy. These non-dischargeable debts can vary depending on the type of bankruptcy filing you've chosen, but there are some common ones among all the different types. Individuals will need to go through all their debts with an attorney to determine which ones are dischargeable and which ones are not.
Typically, no bankruptcy filing will allow you to discharge alimony and child support, federal and state tax liens, student loans, and any debts you incurred while engaging in fraudulent or illegal activity. You will also not be able to discharge debts among creditors to whom you gave insufficient time to examine your case and file proofs of claim. In other words, you're not going to be able to file personal bankruptcy proceedings and then include debts that were incurred on the day before your court proceedings.
The Real Cost of Bankruptcy
Despite what many people believe, being granted bankruptcy does not eliminate all of your debts and allow you to start over from scratch. A typical bankruptcy court will require you to pay at least a portion of your indebtedness depending on your current income levels. If you earn enough money, you may even be forced to pay the totality of your debt, spread over a long amount of time. To the extent that you have assets that can be liquidated, the court may seize them to pay off some of your creditors. Are you willing to lose your home on the lake just to declare bankruptcy?
You also must consider the fact that bankruptcy will be on your credit record for 7 to 10 years in most states. This will make it virtually impossible for you to borrow any substantial amounts of money; be it to purchase a new car, refinance a mortgage, or even send your children to college. Anyone that does grant you credit during that time is going to charge you an excessive amount of interest due to the fact that you've already proven yourself to be a high risk.
Bankruptcy Can Affect Your Work
Individual credit reports are among the many tools employers use to check on the past history of hiring candidates, before bringing them in for interviews. A poor credit history signals to the employer that an individual has made poor financial choices and might be a risk to his company. You'll find it extremely difficult to find a new job, or even get a promotion, with a bankruptcy on your record. Not only that, whether right or wrong an individual with a bankruptcy record might be on the top of the list of suspects if someone in a company is embezzling.
Bankruptcy Will Affect Your Children
Right off the bat, a personal bankruptcy will make it nearly impossible for you to help contribute to your children's college education. This could be a double-edged sword if you earn enough money to limit your child's government financial assistance yet your credit history prevents you from taking out personal loans to help pay for tuition. You may leave your children in a position where they have to take high interest commercial loans that they will be paying for decades, in order to go to school.
A more subtle effect on your children is the possibility that they might learn financial irresponsibility by watching you. It may be far better for you to work out a payment plan with all your creditors, and teach your children financial responsibility by repaying every last penny. There is seldom a case where creditors are not willing to work with you if you will do everything in your power to work out a suitable plan.
Different Types of Bankruptcy Proceedings
Finally, you'll need to carefully consider all of the different types of bankruptcy proceedings and how they apply to your situation. You may find that you have a couple of options, or you may find you only have one. Be sure to hire a competent bankruptcy lawyer to help you make your decision and lead you through the process. If this isn't done properly it's easy to make a bad situation that much worse.