Bankruptcy is a word that’s (usually) met with resistance although there are a many reasons why you would want to file bankruptcy. In 2011, there were 240,151 bankruptcy cases filed in the State of California alone. The numbers vary by year, but 2011 was a huge year for bankruptcy, so we’ll go with that.
If that many people and businesses are doing it, then there must be a reason (or reasons) why.
Reason #1 – Immediate stress relief
You wake up in the morning and you’re still groggy. But when your mind begins to focus, your heart drops – today is another day full of steady, overwhelming worry.
Day after day, week after week, and month after month, this worry can start to consume your life. It’s hard to relax and do simple things knowing that you’re heavily in debt with no foreseeable way out. Each and every cent you spend can make you feel guilty.
This is only amplified if others are depending on you. Not only does your debt put your livelihood at risk, but it puts it at risk for those closest to you, too.
We’re not advising that people file bankruptcy on a whim, but it is smart to weigh the options. Many times the financial and emotional strain of overwhelming debt far outweighs any downsides to filing bankruptcy.
Reason #2 – Creditors “trust” you
Not your current creditors – they probably won’t be your biggest fans.
We’re talking about people giving you credit after the bankruptcy. They’ll have a safety net. Individuals can only file for chapter 7 bankruptcy every eight years. That means that you won’t be able to default on their payments.
Most bankruptcy filers are shocked how quickly they are offered credit after filing bankruptcy. It may seem crazy at first, but lenders will offer you credit cards, car loans, and personal loans very soon after a bankruptcy case. In addition, for most people seriously considering bankruptcy they either already have damaged credit, or they have a useless score (a “high” score but they can’t use it to get any new credit because their debt-to-income ratio is poor). Remember that your credit score is just a number. It’s an important number, but just a number.
Let’s say that you file for bankruptcy, get it together, and make every payment successfully past the bankruptcy for a full year. If you’re a potential creditor looking at that, what would you see? You’d see a person who made some bad choices, but got it together and now pays his bills on time. And even if he does fall back down, he still won’t be able to wipe out the debt in a bankruptcy case for eight more years.
If you believe you’ll be able to function normally if you just didn’t have the debt, then, just like reason #1, it’s something to consider.
Reason #3 – Get rid of taxes (sometimes)
Despite popular belief, it is possible to wipe out taxes in a bankruptcy case. For taxes to be discharged in a bankruptcy case, they must meet a number of requirements. The first, and most important, is that the taxes were due at least 3 years prior to the bankruptcy case. The second is that the tax returns were filed more than two years ago. The third is that at least 240 days have elapsed since the taxes were last assessed by the taxing agency. There are other requirements as well but those three are the basics for taxes to be eligible to be wiped out in a bankruptcy case.
Even if you taxes aren’t eligible to be wiped out in a bankruptcy case, they can often be repaid in a Chapter 13 plan for a very reasonable monthly payment.
BEWARE: Bankruptcy fraud
In this post, we’ve given you three things to mull over if you’re in that stage where you’re considering bankruptcy.
Don’t think you’ll be able to cheat the system, though. Forgiving debts is very appealing, even to those who aren’t in desperate need of it. The most important thing in bankruptcy is to always tell the whole truth. That means disclose everything – all of your assets, creditors, income, expenses, and anything else asked of you. The information contained in bankruptcy forms is signed and certified to be true under penalty of perjury.
The US Department of Justice has an entire department that monitors bankruptcy cases to ensure Debtors are honest and accurate. It’s called the Office of the United States Trustee. If you’re caught providing fraudulent information in a bankruptcy case, the US Trustee can refer your case to the FBI and local US Attorney’s office who can pursue criminal charges against dishonest bankruptcy filers.
There’s a simple way to avoid all that: make sure you tell the whole truth in your bankruptcy papers. That, and hire a good attorney to help you navigate the complexities of bankruptcy and ensure you’re doing everything right.
Wrapping it up – bankruptcy, yes or no?
We’re lucky to live in a society where it’s possible to get yourself out of a hole. In some countries today there is no legal way to escape debt. For most people that file bankruptcy, the downsides are much less significant than they imagine they would be.
Weigh your options. Talk to your family, friends, and, most importantly, a lawyer. Whether or not bankruptcy is right for you will depend on your specific financial circumstances… down the very last cent.