Do you remember your childhood bogeyman? That feeling of uncertainty about the creepy monster hiding under the bed, behind the shower curtain, or the strange shadow that looks half-human, half something else. We’ve all been there at one point in our life, and it’s no fun.
Like the imaginary monsters from our youth, the same emotions can flood our brains regarding finances. Night sweats become very real as adults when we feel like we’re drowning in debt. Bankruptcy may have crossed your mind, but the stigma alone can drive many people away. Although it’s not an excellent option for everyone, it could be a viable one for you. Before making a judgment, learn the truth about bankruptcy.
The best way to expose a myth is to shed light on the truth. First, let’s talk about what bankruptcy is and why it exists. Deciding to file for bankruptcy isn’t easy for anyone, but the purpose is to give debtors a financial “fresh start” from crippling debts. Looking at the long-term effects, the government recognizes that people don’t spend money and pay taxes when people are upside down in debt. It’s a legal way to get in front of an uncomfortable situation.
The two most common forms of bankruptcy are Chapter 7 and Chapter 13. Here are some of the basics:
Often referred to as liquidation bankruptcy, Chapter 7 can wipe away most if not all of your debts in a matter of weeks. To go this route, you must meet the monthly income requirement. If your income is more than the state median, an application will need to be submitted to ensure the system is not being abused.
Liquidation doesn’t mean that every single thing must go. Federal and state exemptions apply to Chapter 7 filings, but it’s best to consult an attorney in the state you plan to file before making any assumptions. Specific properties can be protected in this process, like your home and mode of transportation. Because, after all, without either one of these, a viable income is more than challenging to attain. For example, losing a job because your vehicle was taken doesn’t benefit anyone.
The wage earner’s plan is another name for Chapter 13 bankruptcy. If you’re in a position with a regular income above the state median, this could be a viable option. It allows you to repay all or part of your debts with a structured plan, typically three to five years. This option acts similar to a consolidation loan, and the pressure of creditors banging on your door is relieved because of the legal protections in this process.
Top Myths Exposed
Now that we’ve established some of the basics truths of bankruptcy, let’s go through some of the biggest myths:
Bankruptcy is commonly associated with a sense of shame and humiliation. First of all, it takes a big person to admit when they need help and a bigger person to take actionable steps to get it. This is a legal process to allow for that to happen. Countless famous people have filed for bankruptcy and were highly successful afterward. Abraham Lincoln (yes, the 16th president), Marvin Gaye, Ulysses S Grant, David Bowie, and many more have successfully navigated bankruptcy.
As we mentioned in the case of a Chapter 7 bankruptcy, a total loss is not necessary. Exemptions are pretty generous in most cases. Don’t be mistaken; there will be a loss of assets, and it’s essential to have a clear understanding of those. Bankruptcy law can be complicated. If you’re uncomfortable with what to do, it’s necessary to consult a professional first.
Permanent Credit Blemish
Not true. Bankruptcy will improve your credit over the long term as long as you properly manage your finances after your debts are wiped clean. A “fresh start” allows you to re-evaluate your spending priorities, make lifestyle adjustments, and build back more vital.
One and Done
Again, not valid. Hard times can creep up on us more than once. You can file for Chapter 7 bankruptcy once every eight years. Chapter 13 can be filed every two years, but your repayment plan must be complete before filing again.
One sizable fear is that retirement savings are jeopardized when filing for bankruptcy. Your 401(k) account is covered in the bankruptcy process. The amount doesn’t make any difference, and those funds will be untouched.
The alternative to a 401(k) account is an individual retirement account (IRA). These are very safe and protected up to an extremely high amount in the bankruptcy process. Most pensions are protected, but it’s essential to consult with a professional for details.
Don’t let the hype hurt your future. Just like the big bad bogeyman, the myths of bankruptcy are an exaggeration of the facts. Be fearless in exploring your debt relief options. Your happiness will thank you for it.