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When people fall on hard financial times, there’s one opportunity that creates a fresh start: bankruptcy.
The most responsible people in the world can still end up in a hard financial situation, said Diana A. Ray, a bankruptcy attorney in Glenwood Springs. And now, given the coronavirus pandemic and its effects on the economy, more and more people are finding themselves in scary and uncertain situations.
“I want people to know that bankruptcy is not a bad thing — it’s a right that we all have,” Ray said.
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While bankruptcy is often a last resort, it’s also symbolic of hope and new beginnings. Here are some of the most important facts about filing for bankruptcy.
1. Bankruptcy is a fresh start
A bankruptcy gets rid of a person’s dischargeable debt, completely free and clear, and it’s tax free. Ray said if you owe a creditor $20,000, for example, and the creditor will settle that debt with you for $10,000, you’d still have to pay taxes on the remaining $10,000. With a bankruptcy, you don’t owe the debt or the taxes — and it’s gone for the rest of your life.
When you file for bankruptcy, you have to take a credit counseling course which helps debtors budget their income and expenses.
“It really helps them in the long run to avoid filing for bankruptcy again,” Ray said.
Ray points out that once you file bankruptcy, you’re on the hook for any debt acquired after the date of the bankruptcy filing. A person cannot file for bankruptcy again for another eight years.
2. Bankruptcy is nothing to be ashamed of
Ray’s bankruptcy clients are hard-working, responsible people who have fallen on hard times for various reasons. Some were trying to keep their small businesses afloat, while others built credit card debt they thought they could pay back.
For some, a job loss occurs at the same time as unforeseen medical or other expenses — next thing you know you just can’t keep up with the bills, Ray said.
“It doesn’t mean you’re incompetant or irresponsible,” Ray said. “There’s a stigma around bankruptcy, which is really unfortunate.I would say that most of my clients can’t avoid it.”
3. Creditors can no longer collect on you
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Once you file bankruptcy, creditors are no longer able to collect on you. What’s more, these creditors can no longer harass you regarding the outstanding debt.
“If you’re getting calls from creditors, once you file they have to stop,” Ray said. “It’s called an automatic stay and there are enormous penalties for creditors if they violate it.”
4. Some debts are excluded
Not all debts get erased after filing for bankruptcy. The most common debts that are considered nondischargeable are alimony, child support payments, student loans, and certain tax debt.
“It’s important to talk to an attorney to figure out your options and which debt is dischargeable and which is not depending on which Chapter of bankruptcy you file” Ray said.
5. You will be able to build your credit again
While it’s true your credit score will go down after a bankruptcy, it’s not hard to rebuild your credit and increase your score after filing.
“For many of my clients, their credit score was already bad,” Ray said.
The bankruptcy filing shows up on a credit report for 10 years, but within a year of filing you can start to see increases to your credit score.
“I counsel people on how to increase their credit,” Ray said. “After you file, you’ll be bombarded with offers for loans and credit cards. The interest rate might be higher because of the bankruptcy, but you will get offers.”
Ray said it’s important to build credit again by opening accounts and paying them off. You could open one credit card account, for example, and charge just $20 per month to it and then pay it off in full.
“It shows you’re paying off your monthly debt,” she said.
6. Your home may be protected
Many people worry that because they own assets such as real property, they won’t be able to hold on to those assets after a bankruptcy.
“That might not be true,” Ray said. “Your home is protected as long as it’s under the exemption amount. If you meet the criteria — and most people commonly do — it’s protected.”
There are certain criteria you have to meet, thus, it is always a good idea to discuss your options with a bankruptcy attorney.
7. You can file without your spouse
If you’re married, you can file for bankruptcy on your own or jointly with your spouse. If you file solo, the bankruptcy won’t appear on your spouse’s credit, Ray said.
“In determining whether a joint or single filing is warranted, it just depends on the scenario,” she said. “I routinely file for clients without their spouse being involved.”
8. Bankruptcy is complicated, an attorney is highly recommended
Filing for bankruptcy is a complex process. There are many nuances to the law that could backfire if overlooked.
For example, listing all creditors, listing the appropriate exemptions for assets, and knowing what kind of expenses you can or can’t incur leading up to the filling. An attorney will navigate all of those details.
“At any point, if you’re contemplating bankruptcy, call an attorney because there’s so much planning that needs to be done — so many things you need to do or not do that could affect your bankruptcy.”
“If you think you might file in the future, it’s so important to talk to an attorney. If you think you might be in this situation six months from now, talk to me now.”