Global Grind’s financial coach, Lynn Richardson, shares the truth about bankruptcy in this two-part series:
No one wants to be faced with a bankruptcy, but all too often, people learn that bankruptcy was a viable option to restore them to financial health AFTER it's too late -- AFTER they have lost everything, including, in many cases, their saving accounts, retirement fund, and other valuable assets. Here are a few myths and facts about bankruptcy to help you make a decision that could potentially help you preserve wealth:
MYTH 1: If I file bankruptcy, my credit will be ruined forever and I will not be able to buy a home.
FACT 1: If you file bankruptcy, it will show up on your credit report for 10 years (chapter 7) or 7 years (chapter 13), however, it does not prevent you from obtaining and reestablishing most types of credit. Though you should proceed with sever caution, you can obtain new credit cards and car loans and you can even purchase a home WHILE you are in the middle of a Chapter 13 Bankruptcy (repayment plan) as long as you have been in the Chapter 13 at least a year and you have made all of your bankruptcy payments on time. In fact, if you file bankruptcy, you are MUCH better off than someone who just keeps bad debt on their credit profile year after year with no real plan or resources to pay that debt off.
MYTH 2: If I file bankruptcy, my credit score will automatically decrease.
FACT 2: The actions that lead to bankruptcy (late payments, collections, repossessions, judgments, etc) can have more of an impact on your credit score than the actual bankruptcy itself. I have a friend who filed bankruptcy and her credit score STAYED over 700 even after she filed bankruptcy! How did this happen? Well . . . she never made a late payment or had a collection show up on her credit report. For years, she was using her credit cards to pay her household bills and when she saw her situation getting out of control and she filed bankruptcy while she was unemployed BEFORE she ever made a late payment! She never had a collection or a judgment or a foreclosure, so her credit score did not decrease. The best thing you can do is forecast the depletion of your cashflow, rather than react after it's all gone! Although bankruptcy is not the solution for everyone, it may be a viable option to help you preserve the credit you have worked hard to build.