Everybody has heard the saying “bankruptcy should be your last resort.” We all have a feeling that this must be true because we hear it so often.
It is my opinion, however, that this is a myth created by moneylenders.
Bankruptcy is a legal process that allows you to get out of debt.
- If your debt is greater than your income and assets, then you should file bankruptcy
Below are three reasons how you might harm yourself and your family by making bankruptcy your last resort.
1. YOU MIGHT LOSE YEARS OF INCOME
I often meet people who ran up credit card debts when they were in their early 20s and have been attempting to pay them off for years.
People leave home at the age of 18 or 19 having no experience with budgeting and compound interest.
It is very common for people to rack up high credit card debts in their early 20s, and then spend a decade trying to pay them back with 20-30% interest.
I will often meet these people when they reach their mid 30s, and have no money saved for anything.
They file bankruptcy anyhow once they realize that paying off the credit cards would mean many more years without saving for their financial goals.
People only have so many working years.
You should consider bankruptcy if:
- Your income isn’t enough to pay down your debt in a few months
- You’re wasting a decade of paychecks trying to pay back a credit card
- You can’t save for retirement, a down payment on a house, or to send your children to college because you’re paying your debts
2. BAD THINGS HAPPEN TO GOOD PEOPLE
- Contrary to what you might think, most bankruptcies are not caused by out of control spending
I never meet people who ran up tens of thousands of dollars of debt for vacations and luxury goods.
Most people file bankruptcy because an unfortunate and unpredicted event cost them lots of money and made them go into debt.
- Visits to the hospital
- Job losses
- Reductions in income
- Car accidents that aren’t covered by insurance
It is very common for me to meet someone who had a job with a six-figure salary who got laid off, and then found a job that pays less, or a recently divorced person who must now get by with one salary instead of two.
Not somebody went wild with a credit card buying expensive meals and clothes, booking foreign holidays or leadign a lavish lifestyle.
Often times people with a financial misfortune cash in or borrow from their retirement accounts. Borrowing from a retirement account (Source, Forbes) is a bad financial move because it has tax penalties and the money in those accounts is usually exempt or protected in bankruptcy.
People borrow from these accounts before filing for bankruptcy, but then have to file bankruptcy anyhow because they owe taxes.
What is the sense in spending your retirement money to avoid bankruptcy, when you could file bankruptcy and keep it?
3. BANKRUPTCY IS OFTEN BETTER FOR CREDIT THAN THE ALTERNATIVE
It is true that a bankruptcy filing stays on your credit report for 7-10 years, but your credit rating usually recovers much more quickly.
- You can generally get a mortgage only 2-3 years after bankruptcy, and a car loan within days of filing bankruptcy
- It is not uncommon for my clients to have a 700 credit score or better within two years after filing the bankruptcy
The alternative is to try and pay back the debts outside of bankruptcy. This can take 10 years or more, and during that time you take the risk that a creditor will get a judgment against you.
- A civil judgment or tax lien also stays on your credit report for 7-10 years (Source, Experian)
- If even one creditor gets a judgment against you, it can be just as bad for your credit rating as filing for bankruptcy
Remember, if you file the bankruptcy, however, no creditors can get judgments against you and the debts are discharged completely.
Since you have no debt, your credit rating will improve quickly.
My office offers FREE consultations with an experienced Minnesota bankruptcy attorney. If you are reading this article, then you should find out whether you might be harming yourself and your family by making bankruptcy your last resort.
These consultations do not appear on your credit report, and if a bankruptcy is not in your best interests, I will tell you so.
WHAT TO DO NEXT
If you’re struggling to pay off your credit cards and other debts, and can’t see a way out, then why not see if filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota is right for you?
Speak to us now at 612.824.4357 and we’ll give you all the help and advice you need.
We’re looking forward to helping you.
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