Why bankruptcy should be your last resort

A few years ago, I was at my lowest point financially. I was looking for a solution to rise above the financial crises I was experiencing and trying to find a way to keep my home out of foreclosure. I decided to contact a few agencies and a couple lawyers who all encouraged me to claim bankruptcy and start anew. The second lawyer sold me the bankruptcy dream, and I left his office with a sigh of a relief and plans to return with a $2,500 check to get my life back.

But I kept on researching; and I began to realize that, instead of being a quick fix, bankruptcy was a solution with a seven-to-10-year financial hardship to endure after that. I decided that would actually keep my life on hold instead of letting me start anew.

If you are thinking about going in this direction, please also give the following some consideration.

Seven to 10 Years of Recovery

The quick fix that looks so good now really only lasts for a moment because your bankruptcy will be on your credit report for a maximum of 10 years whether you file for Chapter 7 or Chapter 10 bankruptcy protection. That is a very long time to wait to see total recovery from filing bankruptcy.

Some people will still have to pay creditors after the bankruptcy is final, too, because debts like back taxes and student loans are exempt from being filed in the claim.

(And let's not forget the added expense of hiring a good lawyer to protect any personal assets you still have, such as, your savings account.)

No Loan Approvals, and Guaranteed High Interest Rates

Once you file bankruptcy, you are considered a high-risk consumer and lenders will be leery of lending to you, which makes it almost impossible to get approved for any loans. That means any hope of owning a home, renting a place to live, or buying a car will be extremely difficult for at least five years. If you are approved for a loan, more than likely you will be offered extremely high interest rates and pay twice what the product or service is really worth. Over time, paying such high interest rates for approved loans and credit cards that are needed to help rebuild your credit will cost you lots of money.

Job Hire Restrictions

Times have changed in regard to the hiring process. According to the Society for Human Resource Management, who conducted a survey back in 2012, 47 percent of employers were verifying the credit reports of job applicants before making the decision to hire. Regardless of your education and background experience, having a bankruptcy listed on your credit report will only make it harder for you to get a really good job. Employers may view you as a possible future liability or negligent hire.

Major Decrease to Your Credit Score

Filing bankruptcy will have a negative effect on your FICO score. Usually, everyone who files is advised to expect a huge drop in their score. It is difficult to predict exactly how much a FICO score will decrease too — because it depends on how many accounts a person has that are affected by the bankruptcy and the person's credit profile. With that being said, it is no surprise that having a bad credit score only makes your life harder and opens the door for creditors to take advantage of you. People with bad credit have to be willing to accept ridiculously high interest rates in order to purchase something on credit if they haven't saved up the cash to buy the item. And doing so could put you back in a bad financial position anyway. If possible, it is better to do without while you save up for the purchase rather than to accept such terms and end up paying more.

Living with the Stigma of Bankruptcy

When a person files bankruptcy, they are looked upon in a negative light since they have basically admitted to the world that they cannot afford to pay their bills. In fact, in many states, once you file for bankruptcy, your name becomes public record within the court system, and it may be published in the newspaper for all to see and read. The stigma that unfortunately comes along with filing bankruptcy stays with you for at least seven years; and mentally, you have to be willing to deal with your decision and figure out a way not to feel like a complete failure. The associated negative feelings and the long wait to start seeing major improvements in your financial life can be a heavy burden for some to bear.

What Should You Do Before Deciding to File Bankruptcy?

Before filing bankruptcy, you should take the time to contact a financial adviser to make an assessment of whether they can develop a solution to fix your financial situation. You may have to swallow your pride and reach out to your family or friends to help you during this time of need. For some people, parting with their possessions by selling some of their assets or just downsizing to a cheaper home or rental property can help raise enough funds to pay back creditors.

It might surprise you how interested your creditors may be to help you steer away from filing bankruptcy. If you simply reach out to them and ask them, they may be willing to negotiate low payments or offer to settle to a lower balance to ensure they get some of their money back at least.

If you don't have the gift of gab or good negotiating skills, you can contact a consumer credit counseling agency, who will be more than willing to negotiate payments with the bill collectors, collect one monthly lump sum payment from you, and pay all your creditors each month for you.

There are many people who have no choice, of course, and must file for bankruptcy protection due to their medical expenses, job loss, divorce, or loss of property due to an unforeseen tragedy such as a fire, earthquake, or other natural disaster, in which case I can see how choosing to deal with all the downsides of bankruptcy can be a better option.

Still, you have to ask yourself in the midst of dealing with your financial stress if the quick fix of having your financial slate wiped clean is really worth living with the negative consequences of filing bankruptcy that you will experience for years to come. That is why I really believe that bankruptcy should never be looked upon as an easy out, a quick fix, or a good option. Bankruptcy should always be a person's last resort to fix their financial situation, and a person should take some time to really do the research to decide if this route is really a good fit for them.

Have you considered bankruptcy and decided against it? What helped you overcome your financial difficulties, and how long did it take? Tell us your stories in the comments below!

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JoeM
JoeM
5 years ago

It can also affect things like auto insurance rates, which do check your credit score as well.

Petrish
Petrish
5 years ago
Reply to  JoeM

I agree and believe while filing for bankruptcy people don’t really think about all the things that it will affect later on in life. Establishing and maintaining good credit is very important in life and once the numbers turn bad it can really make your life difficult.

Matt
Matt
5 years ago

I personally think bankruptcy is over-used. But often someone considering bankruptcy has already trashed their credit score. So the thread of bankruptcy ruining a person’s credit score doesn’t carry much weight. Bankruptcy can actually make people more likely to qualify for loans because they can’t declare bankruptcy again for 7-10 years.

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  Matt

I agree that bankruptcy can be over-used and that’s why I really believe that people should really do the research and take the time to think before claiming bankruptcy.

Erin
Erin
5 years ago

Full disclosure: I am a bankruptcy paralegal. While I don’t disagree that filing bankruptcy should be a last resort, I have a few thoughts to add. Most people who are considering filing for bankruptcy already have horrible credit scores because they haven’t been paying their bills. If you can afford to pay your minimum payments and your credit score is still high, you may want to look into attempting to settle your debts yourself or with a debt agency (do not use a for-profit debt consolidation agency, use a non-profit that doesn’t charge you like Greenpath). As far as settling… Read more »

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  Erin

Thank you so much for the information and I agree that finding the right and good lawyer is very important. I really believe that people should really think about all the ways bankruptcy can affect them before filing. In some cases like mine, there may be a better alternative.

JG
JG
5 years ago

This article doesn’t mention the negative effects that negotiating your debt can have. A creditor may still hit your credit score even after you’ve paid the negotiated lower amount. If those negative reports on your score are still going to follow you, what’s the point of paying anything to that creditor?

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  JG

I agree that even when you negotiate to settle a payment it does reflect on your credit score and still adds a slight negative mark. At the end of the day its better to show that you have made some type of effort to pay your debt vice just walking away from it. The lower your credit score drops, the harder you have to work to get it back up.

Anon
Anon
5 years ago

I declared bankruptcy, approximately 5 years ago. Due to a combination of situations, a medical situation and a layoff happening at the same time, our financial house became trashed. We tried limping along for a year, following the Dave Ramsay system, minimizing every possible expense. We tried to negotiate with our lenders – to no avail. We tried to sell our house, but it was under water and the bank wouldn’t approve the sale. (We had put 20% down when we purchased it). We ate rice and beans most of the time. We had no cable, one cell phone with… Read more »

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  Anon

Thank you so much for sharing your story, and I am so glad that you and your spouse are recovering so well from that difficult point in your lives. You are right that bankruptcy may be a good option for some, but people should really think about claiming bankruptcy and not do it for a quick fix. I wish you both the best of luck.

Ely
Ely
5 years ago

My husband filed for bankruptcy while we were dating. He already had terrible credit, no bank account, no job, and it really was a last resort. However, even once he was working again, even making okay money, his life would have been very difficult if not for my excellent credit. He would have had a very tough time finding an apartment to rent when the house he was living in was sold. He would not have been able to get a car or car insurance. I rented the apartment we lived in and insured the car we both used. Now,… Read more »

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  Ely

Thank you so much for sharing your story and your spouse is so lucky to have had your support while going thru the process. I wish you both the best of luck.

Steve
Steve
5 years ago

This post is wrong, top to bottom. I have seen thousands – THOUSANDS – of credit reports, and none are as clean as post-Chapter 7. And people can qualify for a mortgage 2,3,4 years from a chapter 7 (using VA, FHA/USDA, and Conventional, respectively).

Regarding terms, post-BK, you are exaggerating mightily.

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  Steve

Thank you so much for your comment. The key is to really take the time to do the research and seek professional financial advise to be fully aware of all of the pros and cons before filing bankruptcy.

joe
joe
5 years ago

After i was discharged from bankruptcy, i was informed by my trustee that over 67,000 of my payments were paid to the prinipal of my mortgage company during bankruptcy.after 3 years of battling with ocwen lending servicing..they still deny anything was credited to my principal….i’ve filed complaints to everyone in the book to no avail…now their threatening foreclosure…..looks like back to square one !!!!!!…..

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  joe

When I was facing foreclosure it was a agency that specialized in helping people save their homes that gave me some really good advise and gave me the courage to seek alternative methods to take care of my financial crises. My advice to you is to seek at help from a professional, and I wish you the best of luck. Thank you for sharing your story.

Alea
Alea
5 years ago

Fifteen years ago my father declared bankruptcy on $42K in credit card debt. My mom and I were not aware of the issue until it was too late, as he was self-employed and used the cards to cover our living expenses and his “business” so basically for a while he paid bills by just shuffling the money around the cards. To tell the truth, in our situation (renters and not much else to our name) bankruptcy was a blessing, a second chance other countries don’t allow, where you go to your grave with that kind of debt. Mercifully, he understood… Read more »

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  Alea

I love that things worked out for you and your family. Thank you so much for sharing your story.

Tonya@Budget and the Beach
[email protected] and the Beach
5 years ago

I’m relived I’ve never been in that position where I had to decide. I’m sure it’s really tough for those who do. I do think it’s easy to judge people who have had to do it, and hope that people realize there are so many circumstances that could lead up to that. I think medical bills are the number one reason people declare. No one knows when that may happen to them…even when you DO have insurance.

Petrish Dyer
Petrish Dyer
5 years ago

Trust me, Tonya — it’s great that you have never been in the position to have to ponder if you should or should not claim bankruptcy. For those who might feel that it is an option, it needs to be something that they are absolutely sure is the best decision and not just a quick fix.

Carla
Carla
5 years ago

In my (medical) support group, its not unusual to hear of people having spent tens of thousands of dollars out-of-pocket on medical expenses that insurance doesn’t cover. Some are well off enough to afford it and others are living hand-to-mouth and in debt because of it – not to mention many of use cant work full or even part-time because of our illness.

uri
uri
5 years ago

i’m not an expert on bankruptcy but i am a consumer attorney and i observe the bankruptcy scene. this article strikes me as wrong about many details. it reads like a recap of untrue or exaggerated myths. i recommend john skiba’s website for reliable information about bankruptcy: http://skibalaw.com/how-bankruptcy-can-help/ he also has a good podcast called the consumer warrior. he practices law in arizona but the rules are fairly similar across the country. bankruptcy is wrong for a lot of people in a lot of situations, but for some people it should not be the last resort. in some circumstances, waiting… Read more »

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  uri

Thank you so much for the great information.

Chris Huether
Chris Huether
5 years ago

I am an attorney who handles bankruptcy cases on a fairly regular basis. All I will say is that all of the issues noted above are things any good bankruptcy attorney should discuss with you; you shouldn’t have to find them out on the internet. The attorney who “sold me the bankruptcy dream” for $2,500 does a disservice to the profession. I’ve told plenty of people it doesn’t make sense for them to file or there are better options. The solutions and thoughts above aren’t so cut and dried, either. I’ve seen debt counseling agencies rip people off so bad… Read more »

Petrish Dyer
Petrish Dyer
5 years ago
Reply to  Chris Huether

I really appreciate your comment. I would hope that lawyers would not take advantage of people during their time of distress. It’s also nice to get a glimpse of a lawyers perspective.

Tricia Cliff
Tricia Cliff
5 years ago

The people I truly admire (second only to those who find a way to not file at all) are those who file for bankruptcy and then, after their financial house is back in order, go back and pay their creditors even though they do not have to legally. I know a couple people who fall into this category, and it is such a blessing to know that there are folks out there who refuse to make others pay for their financial problems, self-induced or not. One of my favorite movie scenes: Cinderella Man, when Braddock (Russell Crowe) goes back to… Read more »

Mike in NH
Mike in NH
5 years ago
Reply to  Tricia Cliff

“I believe we live in a great country, a country that’s great enough to help a man financially when he’s in trouble. But lately, I’ve had some good fortune, and I’m back in the black. And I just thought I should return it.”

Such a good story/movie.

kay ~ lifestylevoices.com
kay ~ lifestylevoices.com
5 years ago

Having been through bankruptcy I can only say that the years leading up to it were really bad. The stress and subsequent medical bills only added to the misery. When all of your creditors not only won’t work with you, but demand payment in full, and credit counselors advise you to file for bankruptcy, as does the attorney, there isn’t a lot of wiggle room. It’s not fun filing for bankruptcy, but if you learn to live within your means afterwards and use cash instead of credit, it’s worth it. People need to do what they need to do and… Read more »

Petrish Dyer
Petrish Dyer
5 years ago

I appreciate you sharing your story which gives people an insite with such a taboo topic. I totally agree with you that people shouldn’t be worried about what others think and do what is best for themselves and their families.

Nick @ Millionaires Giving Money
Nick @ Millionaires Giving Money
5 years ago

I was in a very similar situation where I was contemplating bankruptcy. I eventually dismissed the idea and decided to communicate positively with all my creditors to get my financial situation under control. I explained my situation and the creditors were willing to stop interest charges and lower my monthly payments until I got back on my feet. Eventually when my position improved I returned to the monthly payments with little impact on my credit file. Thanks for the great advice.

Petrish Dyer
Petrish Dyer
5 years ago

I think that it is so awesome that you went this route, which is another example of how some people can rise above their financial crises and get back on their feet. Good on you and I wish you the best of luck.

AMW
AMW
5 years ago

My husband and I considered bankruptcy approximately 15 years ago. We decided against it but the reason had nothing to do with finances. It isn’t all about the bottom line. Our debt was all debt created due to my child’s medical issues. It was something out of our control but we agreed to pay those doctors when they treated our child. While we amassed a six figure debt (yes, our portion after insurance) in about a few short years, those doctors saved my daughter’s life. We decided that it we needed to be individuals true to our word and pay… Read more »

Petrish Dyer
Petrish Dyer
5 years ago

Your perspective is not of the norm, but so honorable. If more people thought this way, for some debt would be more managable for people would make it a priority to pay their bills on time.

Brian
Brian
5 years ago

Great, and admittedly somewhat alternative outlook on debt– very refreshing to read.

Spoco
Spoco
5 years ago

I agree that you shouldn’t just actively seek out bankruptcy as part of a financial plan, but this is the worst researched article to ever appear on GRS. There are blatant untruths throughout.

The comment about five years before you can purchase a house is simply bad information. You can get an FHA loan in 1 year post Chapter 13 and 2 years Chapter 7. Conventional loans are available after four years.

TAC
TAC
5 years ago

My wife and I declared after our live in tenants, in-home murder left us building on a budget. The banks said they’d finance 95% of the project requiring only 5% down upfront because our crime scene could not be sold. This forced us to hire a bad but affordable contractor who did not pay his subs despite having been paid in full. We had multiple liens which we had to lawyer up and fight since the state laws leave no protection for homeowners. After winning easily (these people had no right, or validation to lien us) we could finally refinance… Read more »

okee
okee
5 years ago

“…which makes it almost impossible to get approved for any loans. That means any hope of owning a home, renting a place to live, or buying a car will be extremely difficult for at least five years.” Not true at all. Spouse and I discharged debt with a chapter 7 and qualified for an FHA loan at 3.25% 24 months after bankruptcy. Were also able to use IRA money penalty free as a “first home” purchase even though it wasn’t our first home. Aside from the bankruptcy derogatory and few negatives from discharged CC debt, we didn’t/don’t have any other… Read more »

Michael S
Michael S
5 years ago

I filed bankruptcy after years of payments, and living with massive credit card debt. I tried to avoid it, but I finally had to after the recession hit my employer in 2009. A year of less and less hours (down to 30 or so) finally took its toll. I was taught credit cards are normal, and having debt was a way of life. This got me into bad trouble, and I will never, ever, ever let my children leave home thinking this same way. 1. No loan approvals/High interest rates: While this is true, If you are considering bankruptcy, most… Read more »

Thomas
Thomas
5 years ago

I am an attorney. This article is full of misinformation. First, what is chapter 10 bankruptcy? There is chapter 11, 12, 13, and 7. No 10. Second, bankruptcy in many cases helps your credit. A huge part of what goes into your credit score is your debt to income ratio. For instance, if you make 40 thousand a year, but owe 100 thousand in unsecured debt your debt to income ratio is out of balance. You are going to pay a higher interest rate if you get approved for a loan. Filing bankruptcy immediately improves your debt to income ratio.… Read more »

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