Your debt feels impossible. New bills and past due notices are showing up daily. Creditors won’t stop calling. Just as you feel like throwing your hands in the air, you come across a solution that might be the best for you: filing bankruptcy.
Because of the COVID-19 pandemic, this is a reality many Americans are facing. Millions of Americans across the country have been unemployed since earlier this year. It’s incredibly easy to get behind on bills when the money isn’t coming in, but the bills are still showing up. It’s an overwhelming feeling. Seeing a new bill arrive each day, knowing you can’t cover it. Combine this with the question of, “How can I pay this bill with no job?” and it’s easy to see why the COVID-19 pandemic could be the cause of millions filing bankruptcy.
The longer this pandemic continues, the more likely it is that you’ll have some attorney in a TV commercial asking if you’re in thousands of dollars of debt, if you’re feeling overwhelmed by creditors and looking for a solution. While you’re thinking that sounds exactly like your life, this attorney is going to present the option of filing for bankruptcy because it’s the easiest way to get out of debt and the best way to get your life back.
It sounds great, right? Getting your debt forgiven and finally being out from under the stress and anxiety it carries.
To quote ESPN College GameDay analyst Lee Corso, “Not so fast.”
Filing bankruptcy might help you get rid of your debt, but it’s important to understand the serious, long-term effects it has on your credit. When you file bankruptcy, it remains on your credit report for 7-10 years as a “negative remark,” and it affects your ability to open credit card accounts or get approved for loans with favorable rates.
What exactly is bankruptcy?
Bankruptcy is a legal process designed to help individuals and businesses eliminate all or part of their debt or, in some cases, help them repay a portion of what they owe.
There are several types of bankruptcy, but the most common types are Chapter 7, Chapter 13 and Chapter 11.
Chapter 7 forgives most of your debt and allows you to keep all of your assets with a few exceptions depending on state and federal laws. During the process, you and your creditors are invited to a meeting where they are allowed to make a case as to why a federal bankruptcy court shouldn’t forgive your debt. Once your case is approved, your debt will be forgiven, and none of your creditors are allowed to hassle you over the forgiven debts.
Chapter 13 is different from Chapter 7 in that it requires you to come up with a plan to repay your creditors over a 3-5-year period. After that, your debt is forgiven.
Chapter 11 is generally for small business owners. It allows small business owners to retain their business while paying back debts according to a structured plan. With this option, business owners give up a certain amount of control to court officials, debtors, or counselors assigned to help you rebuild your credit. Despite losing some control of your business, owners are able to keep their business running while working on the financial future.
Things to consider if you’re thinking about filing bankruptcy
It’s important to note the serious impact bankruptcy has on your credit report. Bankruptcy effectively wipes out everything on your credit report – the good and bad remarks – and it stays on your credit report for 7-10 years.
Which means, any account you’ve paid off or left in good standing that could positively impact your credit score is wiped out. All the hard work you’ve put into building your credit is basically nonexistent once you file bankruptcy. True, all the negative remarks are gone, your debt is forgiven and you might even see your credit score go up, but you’ve pretty much labeled yourself high-risk when it comes to lending.
Bankruptcy seriously affects your ability to open lines of credit – credit cards, mortgages, auto loans, personal loans, etc. Because you are now labeled high-risk, most – if not all – banks will likely deny any application you submit for a line of credit – even though your credit score might have gone up. There are a number of factors that determine your credit score, but payment history, access to credit and derogatory remarks have the highest impact.
When you file bankruptcy, you wipe out all of your past payment history, eliminate your access to credit and end up with a derogatory remark regarding the bankruptcy left on your credit report. If you are approved for a line of credit, you’ll likely get a much higher interest rate which will make any monthly payments higher.
Take a car loan, for instance. The average APR for a car loan for a new car for someone with excellent credit is 4.96% while the average APR for someone with bad credit is 18.21%. If you’re able to get a car loan, you’ll likely get an APR closer to the high end because of filing bankruptcy. The same will be true for credit cards (forget getting a great credit card with rewards or a good rate), personal loans or mortgages.
Should you file for bankruptcy?
When it feels like your debt is caving in on you, bankruptcy might seem like the only way to reach financial peace. Don’t jump to that as a first option. Check out other, less painful options that don’t have nearly as many negative consequences in the long run.
Here are a few steps to consider taking first:
- While it’s easier (and let’s be real, more pleasant) to ignore your creditors, take a moment to talk to them. Negotiate and see if there are options to make your debts more manageable. Can you lower the interest rate? Is it possible to settle for less than you owe? Can you set up a payment plan?
- Talk to us about your financial picture. Let us help you find options to dig your way out of the hole you’re in while also keeping you from getting back in a difficult situation. We might have options that will allow you to consolidate your debt into one, more affordable payment.
- Go through your house. Do you have things you don’t use or need that you can sell? If so, sell off those items and apply that money to your debt.
Also, it’s important to note that not all debt is eligible for bankruptcy. While bankruptcy can eliminate a lot of your debt, some types of debt cannot be forgiven.
- Most student loan debt (although some members of Congress are working to change this).
- Court-ordered alimony.
- Court-ordered child support.
- Reaffirmed debt.
- A federal tax lien for taxes owed to the U.S. government.
- Government fines or penalties.
- Court fines and penalties.
Ask anyone who understands finances and most of them will tell you that bankruptcy should be an absolute last option. It might sound like a really good idea and filing for bankruptcy does end up being the best option for some people. But it should be the last option you consider because of the long-term damage it does. Look through your debt, see what you owe and carefully consider all of your options. Again, come in and talk to us. Let us see if we have better options that can help you. We’re your credit union, and we’re here to help you.