The Basics of Bankruptcy

I can’t believe I am thinking about filing for bankruptcy. How did this happen?

 

In America, most people never received any sort of training on the uses – and the dangers – of consumer credit. Therefore, most of what we know about credit comes from advertisements that stress “Low monthly payments”, “No payments until 2012”, “Master the moment with MasterCard”, “You can have it all.”, and other catchy slogans. This, combined with an unprecedented economy, leave people in debt up to their ears and facing a potential lifetime of debt slavery.

Doesn’t bankruptcy help people get free from these debts? I will just file bankruptcy and not get in this trap again.

 

Filing a personal bankruptcy can eliminate the oppressive debt burden and give someone a fresh start. That is what Congress intended when they drafted the law – to grant people relief from their debt in order to allow them to contribute to the economy again.

However, without training, people can fall into the same traps. Filing a bankruptcy is what we at the firm refer to as a “teachable moment.” Let’s face it, nobody likes the thought of filing for bankruptcy, but it is during that time where you are willing and diligent enough to learn a different way of thinking. I cannot count the amount of times my clients tell me, “I will never touch a credit card again.” And I also cannot count the amount of clients who file for bankruptcy for a second time because they refused to learn the first time. Therefore, it is strongly encouraged that, if you decide to file bankruptcy, use it as a time to learn other new and different habits to insure you do not fall back into the old habits that led to the bankruptcy. Because before you know it, the emotions you feel when filing the bankruptcy will soon be forgotten and it is too easy to fall into traps again.

Why is it so easy to fall back into the same traps? Why worry about your credit in the future?

 

There is a difference between relying on credit and using credit wisely. The sad truth is that a good credit score affects more than just your ability to borrow money. Your credit score is now a factor in whether you get hired for a job that you want, whether you can rent an apartment or start a business, and it even can influence the amount of premium that you pay for auto insurance. Therefore, people should learn how to clean up their credit report and how to move their credit scores up.

Credit is a part of the American way of life. Chances are that sooner or later, a person will have to reestablish and use credit. But people must learn how to use the credit system rather than being used by the credit system.

But isn’t it true that bankruptcy ruins a person’s credit and that they can’t hope to get credit cards, mortgages or car loans for 10 years — or was that 7 years? It will take forever to rebuild credit again.

 

No, that is not true. It is neither 7 nor 10 years – credit can come back immediately. There IS life after bankruptcy. Our clients report that once their bankruptcy case is over, their mailboxes are full of credit card offers, and, they can finance an auto right away (providing that they have income to afford it). The FHA has a program that will provide a mortgage for someone 24 months after a bankruptcy discharge if he has 3.5% down payment on a home (providing other underwriting requirements are met). That is why it is critical for someone fresh out of bankruptcy to understand how the credit industry operates.

Why would any creditor lend money to someone who is bankrupt?

 

New creditors don’t really care what happened to the old creditors – they just want to know that they will get paid. When someone has his debts discharged in a bankruptcy, he has no demands on his money – so he shouldn’t have problems making payments. Depending on the type of bankruptcy filed, it could be 4 to 8 years before another bankruptcy can be filed to discharge unsecured debts. From the creditor’s perspective, a freshly bankrupt person with decent income is the perfect borrower.

Trevor Neely
Author: Trevor Neely

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