Finance101 guide: Should I file for bankruptcy?
Bankruptcy often seems like a death sentence — the media often links the proceeding to majorly public scandals like Enron, Lehman Brothers or Real Housewife Teresa Giudice’s IRS troubles.
The truth is that bankruptcy doesn’t necessarily mean the end. It could be an opportunity for you to reorganize and come back stronger than ever. However, whether or not bankruptcy is right for you depends on your unique situation.
What is bankruptcy?
“Bankruptcy helps people who can no longer pay their debts get a fresh start by liquidating assets to pay their debts or by creating a repayment plan,” reads the United States Courts website. “Bankruptcy laws also protect financially troubled businesses.”
Put simply, bankruptcy is a legal tool to give individuals or companies a “fresh start” from unmanageable debt. The U.S. Bankruptcy Courts handle all bankruptcy cases, sub-units of the federal court system.
There are six basic types of bankruptcy you can apply for depending on your needs for relief. These are usually referred to their chapters within the U.S. Bankruptcy code.
• Chapter 7: Individuals can file for this. Businesses can file in order to liquidate.
• Chapter 9: Municipalities (e.g. cities, towns, villages) can file under Chapter 9 in order to reorganize.
• Chapter 11: Businesses can also file in order to reorganize.
• Chapter 12: Fishermen and family farmers file this for debt relief.
• Chapter 13: Known as reorganization bankruptcy, this is for individuals with property they’d like to keep.
• Chapter 15: This is for filings with parties from more than one country.
The U.S. Courts website recommends seeking the counsel of a bankruptcy attorney before filing. You can file without one (this is called pro se) but a lawyer can guide you through the proceeding and the financial and legal consequences associated with bankruptcy.
To actually file, individuals, married couples and sole proprietors will fill out forms numbered in the 100 series forms. Entities like corporations, partnerships or limited liability companies will fill out forms numbered in the 200 series.
If you’re worried about appearing before a bankruptcy judge, don’t be. Filing bankruptcy is mostly administrative, says the Administrative Office of the United States Courts. Debtors will probably not appear in front of a judge unless objections are raised. Chapter 13 applicants might have to attend a confirmation hearing but otherwise, the meeting with creditors is the only formal proceeding.
When declaring bankruptcy makes sense for you
Although filing impacts your credit and your ability to get loans, bankruptcy could be a hidden blessing, attorney Nicole “Nic” Cober told EBONY.com. She is more than familiar with what happens when you file for bankruptcy. Cober’s memoir, CEO of My Soul, tells the story of her personal and business bankruptcy and how she dealt with debt, divorce and financial troubles.
“Bankruptcy proceedings allow you to stop digging a deeper hole for yourself,” Cober told EBONY.com. “You can start to look up and move forward; time will pass and you can start to rebuild.”
On her LinkedIn page, Cober said she thought she had it all with her first business in Washington D.C., Soul Day Spa and Salon. However, things unfortunately fell apart and she was forced to close her business and file for bankruptcy.
Cober proved that there is life after bankruptcy, coming back stronger than ever and becoming the principal managing partner of Cober Johnson & Romney, a legal and business consulting firm.
When declaring bankruptcy is a mistake
Depending on your financial situation and the kinds of debts you have, bankruptcy might turn a bad situation into a dire one. Tracie Forbes of Penny Pinchin’ Mom admits that bankruptcy didn’t work for her.
“It was my biggest life lesson of all, and it took more than 10 years for me to overcome,” Forbes wrote in GoBankingRates.
Turns out her debt was far from over after leaving bankruptcy court in 2002. Debts piled up again, becoming unbearable.
“That is when I realized: Bankruptcy was not the answer,” writes Forbes. “It taught me nothing. I never took the time to figure out why I had built up that debt.”
Besides reassessing financial habits like Forbes did, bankruptcy might not be worth it if your debts aren’t qualified for dismissal or if you can’t handle the consequences. If you’re wondering how long bankruptcy stays on your credit report, you might be shocked to know it’s a whole 10 years.
Be wary of the racial disparities in bankruptcy filings
Questions are raised about the fairness of the U.S. bankruptcy system in a 2012 paper from the Journal of Empirical Legal Studies. “Race, Attorney Influence, and Bankruptcy Chapter Choice” found that black debtors are more likely to apply for Chapter 13, which the authors argue offers less relief.
Upon analyzing data from the Consumer Bankruptcy Project, the paper’s authors found that bankruptcy attorneys were more likely to recommend Chapter 13 to black debtors. Chapter 13 might have some advantages, but might require debtors to put all disposable income towards creditor repayment over three to five years. Debtors only turn over nonexempt assets if filing Chapter 7.
Surviving the emotional fallout of declaring bankruptcy
“Oftentimes a person’s self-esteem takes a stronger hit than their finances,” Rebecca Snyder of Evergreen Financial Counseling told U.S. News.
Filing for bankruptcy might cause you sadness, grief and shame. Filers might worry that their family will think less of them, be fearful of what might happen to their credit score or fret over whether bankruptcy will work or not.
If you know someone going through bankruptcy, it’s important to make them feel like they’re not alone (many people file for bankruptcy every year) and dispel bankruptcy myths. If you’re going to go through a painful experience, might as well learn something from it!