The Three Biggest Bankruptcy Fears
Most people are downright scared of filing bankruptcy. That's not necessarily a bad thing. Bankruptcy doesn't have to be a last resort, but it should be considered a serious step that carries with it certain consequences.
That said, most of the dire predictions people hear (on the Internet and elsewhere) about the "tragedy" of filing bankruptcy, or the inescapable complications they'll face, just do not materialize.
When you think about filing bankruptcy, what is your worst fear?
I will never qualify for a mortgage (or a car loan or a credit card) again.
Of course you will be able to buy a house, or a car or get a credit card again. And it will happen much sooner than you would probably predict. Most people assume that they can't get any credit for seven or ten years, based on the length of time a bankruptcy will appear on your credit bureau report. In reality, you'll be able to get credit immediately after your discharge is granted.
You're probably wondering how that can be. After all, didn't you just wipe out a bunch of credit balances? Who would want to take a chance on you? As it turns out, plenty of lenders will. There is no law that would prevent a creditor from extending credit to you. In fact, there are creditors who market to people who recently completed bankruptcy cases. These creditors know that your future bankruptcy options are limited for a number of years, so their chances of losing money on you through bankruptcy are nil.
Plus, these lenders can use your recent financial circumstances to justify charging you a higher interest rate. Add to that the fact that you've just freed up resources by eliminating other debt, and suddenly you're a hot prospect.
Companies such as Capital One and Orchard Bank offer secured and unsecured credit cards to recent debtors.
Many of my clients also report that local car dealerships send them letters offering to help them re-establish credit with new and used car deals. In fact, many borrowers can qualify for an FHA loan after just one year, and a VA loan after two years.
No doubt you'll pay more for your credit immediately after a bankruptcy, but within about two years or so, with a clean record otherwise, your credit score could rise to a very respectable level that will allow you to obtain good, if not excellent, credit rates.
I will lose my property.
In only about two (2%) percent of bankruptcy cases will individual debtors be required to turn over any property to a bankruptcy trustee. For most filers, their personal property and the equity in their real estate will be exempt from turnover. Each state either has its own exemption scheme or makes use of the scheme included in the federal bankruptcy laws. For the most part, these exemptions will be generous enough to cover your property.
For the small minority whose property exceeds the allowed exemptions, a qualified consumer bankruptcy attorney can often work with the debtors to convert non-exempt property (like cash) into exempt property (like retirement savings).
Here's an article that explains more about exemptions: The Fate of Nonexempt Assets in a Chapter 7 Case.
My friends, family or colleagues will find out.
What our friends and loved ones think of us is a powerful motivator. The fear that our bankruptcy filing will become public knowledge can be paralyzing. For many, the stress of dealing with obnoxious bill collectors pales in comparison to the possibility that someone we know will find out about our bankruptcy case.
Bankruptcy cases are public court records, but generally the information on an individual bankruptcy case is not widely published unless it is newsworthy. The filer's creditors are notified by mail, along with certain government agencies, but the days of publishing a bankrupt's name in a list in the legal notices of the local newspaper are (mostly) long gone.
The chances of your acquaintances finding out are very low, unless you tell them yourself.
Perhaps it might calm you a bit to know that about one in ten adults will file bankruptcy sometime over the course of their lives. So, next time you're in church or at a family gathering or even watching the game with friends, think about how there's a good chance someone sitting near you has or will file bankruptcy. You're in good company.
To learn more about bankruptcy and your job, read Will Bankruptcy Affect My Job or Future Employment?
Updated January 17 by Carron Nicks.