Life After Bankruptcy: Debunking the Myths
Many people trapped in the throes of financial distress wonder if bankruptcy is a lifeline, a choice that could end the misery of creditors calling and writing and the stressful uncertainty of not knowing how to move forward with their lives. Like all big decisions in life, what stops us is the unknown. One of the biggest concerns stopping people from investigating bankruptcy is the mythology surrounding what happens to people who filed bankruptcy after they filed bankruptcy. Having helped people do this over and over for decades, I can write with first-hand authority that many of the things people hear or even read about life after bankruptcy are fear based, and not fact based. Let’s debunk some of those myths by presenting some truth.
9 Bankruptcy Myths - and the Facts
Myth #1. You will feel shame and consider yourself a failure.
This is just not true. You will absolutely feel better. Filing bankruptcy will be the point at which you STOP feeling shame and considering yourself a failure. You have become habituated to the stress you are under to the point where you don’t even realize the effect it is having on you. After you file bankruptcy you will feel a sense of relief. There’s a reason for that – you will have taken a step to better secure your financial future for you and your family. Rather than chase debt payments, you will have the opportunity to use the money in your life for the things you and your family need and want. I could go on and on about this – one of my favorite things in bankruptcy is seeing my clients after they file because they all, without exception, look better. They are less stressed, more rested, couples are sitting closer together, more color in their faces, their postures more relaxed.
Myth #2. Your credit score will be ruined for 10 years.
The bankruptcy on your credit report will have an affect on your credit score in two ways. First, it will have a negative effect all by itself. Second, however, it will clear out all the other debts that comprised part of the analysis that lenders make about what payment you can afford. Think about it – when you have no debts, a lender doesn’t have to assess how you will make all your payments – just the mortgage payment. Those debts discharged by the bankruptcy will also stop reporting over time. So those 90 day late payment notices that have been bringing down your score will, over time, disappear and your score will improve. One top of that, you will work with our firm to develop a strategy to improve your credit score after your bankruptcy is over. As time passes, the negative impact of the bankruptcy on your credit will begin to count less and less against your credit score.
Myth #3. You will not be able to buy a house.
You can absolutely buy a house. See the immediately preceding answer about your credit score and how bankruptcy will have a negative effect on your credit score in one way and in other ways a positive effect. After you file bankruptcy, there are a few loan products that aren’t available to you. You may have to pay a little more interest. You might have to put a little more down. But you can absolutely buy a house. Over time, your credit score will improve, your income will increase, your home equity will go up and you will refinance into a better rate. While this is a big fear of many people thinking about filing bankruptcy, the truth is many of them have poor credit preceding their bankruptcy, making home buying or refinancing problematic anyway. Many of our clients are MORE able to buy a house after bankruptcy.
Myth #4. You will not be able to rent an apartment.
This matters more to some landlords than others. You will not be completely shut out of renting, but there are some landlords who would rather rent to tenants with higher credit scores. Your bankruptcy will mean less and less the more time passes. You may simply have to take some of the money you are not spending on debt payments and set it aside to put down a higher deposit.
Myth #5. You will not be able to buy a car.
You will be inundated with offers to buy a car by dealers who use the bankruptcy records to prospect for buyers. They know you just got rid of all your debt and will more easily be able to handle monthly payments. Let’s be honest here, many of these offers will have high interest rates and could be considered predatory. But not all. And if you really need to trade up, you will have the opportunity. (Hint – this is one of the ways you will build your credit back up: by financing a car and making the payments on time).
Myth #6. You will lose your home.
You do not have to lose your home. In Washington State, if you have less than $125,000 in equity in your home, you can exempt the equity and keep the home. If the equity in your home exceeds $125,000 you can file a chapter 13 bankruptcy and make payments over five years equal to the amount of equity in excess of $125,000 and keep your home. In other words, you have options for keeping the house.
Myth #7. You will lose all your stuff.
Most American households are filled with things that are exempt from their creditors and your is almost certainly not an exception. Unless you have something unusual like an extensive art or antique collection, you are keeping everything you own. The reason for this in large part is the practical way in which things are valued in bankruptcy. Your possessions are valued based on the amount they are worth right now, if you sold them quickly on the internet or at a garage sale.
Myth #8. You will lose your job.
It is against the law to fire you because you filed bankruptcy FULL STOP end of discussion. (Jobs with certain security clearances are admittedly an exception).
Myth #9. No matter what, you’d be better off paying off your debts.
This is not true if your debts are consuming a large portion of your monthly income, you can’t see a path to paying them off within 5 years and especially if paying your debts is creating pressure on paying for the things you need, like food, insurance, medical assistance, utilities, rent or mortgage payment.
Do not let fear of any of these things, or anything else, stop you from contacting us immediately to learn about your bankruptcy options and what’s really true about filing bankruptcy, the bankruptcy process and life after bankruptcy.
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