Bankruptcy provides emergency relief from creditors when all else has failed. Here are some things to know about bankruptcy before you file:
You can’t go to jail
It is a constitutional protection in the United States that you cannot be sent to jail for nonpayment of debts (with the exception of some fines imposed by the government). It is comforting to understand that is not a risk you face.
Bankruptcy messes up your credit
If you file for bankruptcy, you will face challenges conducting personal business, borrowing money, getting a credit card, buying a car or a home. These problems will likely last for seven years.
Some debts can’t be discharged (eliminated) in bankruptcy
Most tax obligations and student loans cannot be discharged in bankruptcy so you will still owe those debts even after bankruptcy.
Secured debts must be paid
If you want to keep assets secured by loans such as, your home or your car, you will have to eventually make payment arrangements to keep them. You can’t file bankruptcy, have your home mortgage discharged, and then keep the house.
Bankruptcy can eliminate debts
In bankruptcy, the court can discharge many debts so that you do not have to pay them back — ever.
Filing bankruptcy can stop foreclosure
Filing bankruptcy can put a stay on a foreclosure proceeding. This may allow you to keep your home if you can make the mortgage payments.
Filing bankruptcy can stop repossession
Like staying a foreclosure of your home, filing for bankruptcy can stay a repossession of your car. Ultimately, you’ll only be able to keep the car if you can make the payments.
Bankruptcy can stop garnishments
You can end a garnishment of your wages through bankruptcy.
Bankruptcy can stop harassment from creditors
If you are getting a constant barrage of calls from creditors, you can stop it by filing bankruptcy.
You can only file for bankruptcy once every 6 years
You can only file for bankruptcy once every 6 years. Because it has such a negative impact on your credit, you don’t want to file bankruptcy too soon. Make sure it really is your last resort.
Your bankruptcy won’t protect a cosigner
If you had a parent or other relative cosign on a loan, your bankruptcy won’t prevent the creditor from collecting from your cosigner.
There are two types of bankruptcy. You can file a “Chapter 7” bankruptcy which presumes that you do not have and will not have the means to repay the debts you owe. A “Chapter 13” bankruptcy involves developing a plan, negotiated with creditors, to repay much of the debt.
You can keep some property
What property you can keep varies by state and according to the facts and circumstances of your case, and whether you file a chapter 7 or chapter 13 bankruptcy.
You need an attorney
Although you can legally file for bankruptcy without an attorney, as a practical matter, your creditors will be paying most of the costs. What you pay your lawyer would likely go to your creditors otherwise.
Bankruptcy is no fun, but the laws exist for a reason. By allowing families a chance at a fresh start, governments show respect to the rights of individuals over corporations and businesses.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.