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Life After Filing Bankruptcy

smiley_faceThere is no way to know what life after bankruptcy is going to be like for you. Everyone’s credit problems are different and the debt, income and future life experiences we all face are unique. However, there are certain generalizations that can be made about life after bankruptcy.

First, in your life after bankruptcy you probably will not have all of your creditors overwhelming your thoughts and you will not have all the stress about your debts. Second, and most importantly for reclaiming your life, bankruptcy does not seem to have the stigma it had when I started practicing 26 years ago, or even what it had 10 years ago.

Let’s briefly touch on the stigma of bankruptcy. I approach bankruptcy purely as a business decision, and my role is to guide you through the legal process in an efficient, legal, and, hopefully, cost-effective manner.  The debate over the morality of bankruptcy occasionally is debated on the internet and in the popular press. I really don’t engage in that because I question the morality of those who carelessly lend money to people in need who obviously cannot afford to pay it back at interest rates that used to be illegal (33-50%!); who illegally harass the vulnerable to collect a debt and say unimaginably cruel things to people from whom they are collecting; and those who just aren’t willing to give people a fresh start, even in theory.

When I read that the credit card industry sent out $30 billion of credit card solicitations in 2006 alone (and probably as much in 2007), I think that bankruptcy is not killing the banks. When I read the statistics on how high the percentage of people who have no health insurance is, and how high the divorce rate is, I know that there will be people who just cannot pay their bills, no matter how hard they try. Usually, the people who argue against filing bankruptcy say that people who file should never file, that it is somehow immoral. Some of them base their arguments on the Bible.

However, they might be surprised to find that the American legal tradition of allowing for bankruptcy stems from Deuteronomy 15:1-11, which calls for debt forgiveness every seven years. In fact, until the bankruptcy code changed in October, 2005, you could file a chapter 7 bankruptcy every 7 years. Is that a coincidence? (Of course, there are those who say the Founding Fathers created bankruptcy because of their high personal debts to England)….I’ll leave that debate to the moralists, historians and Biblical scholars.

The fact of the matter is that most of the people I see are good, honest folks who have come upon hard times and have no other options. They have exhausted their non-bankruptcy alternatives and cannot pay their debt,  no matter what they do. What are these people to do? Be hounded by their creditors until they die? That is not a very charitable or merciful argument.

Most people tell me of how they have tried to pay their debt, cashed in their retirement, borrowed from relatives to pay their creditors, sold their furniture and other assets, and of how they do not want to file bankruptcy, but need help. Many come to me because relatives who see them struggling and have figured out they have no other options drag them in to hear about it because they would not come in on their own. Statistically, it has been shown that most people file bankruptcy because of medical problems, divorce, loss of employment, or a combination of all three.

It is against this background that the stigma against bankruptcy seems to have fallen away, especially in light of the economy in the new millenia. While you hear of people abusing the system, and some do,  just like in any system, most people know someone who has filed bankruptcy who needs the help and hasn’t caused his problems.

After bankruptcy, your debts which are dischargeable will be wiped out. You do not have to repay them. Most people are left with a car payment and house payment, if they have those kind of debts. Unless they owe recent taxes, school loans, or have payments they need to make for furniture or other purchases they have made for items they want to keep where the bank financed the purchase of those items, they will have no other payments.

Your creditors cannot contact you in any way about paying the debt that has been discharged. It is illegal for them to do so, so that you can get a fresh start and begin again, putting the past behind you.

The credit bureaus are supposed to report the fact that you filed bankruptcy. It is my understanding that a chapter 7 is an I-10 on your credit score and a chapter 13 is an I-9. This is on a scale of 1-10, with a 1 being an excellent type of credit entry. Also on your credit report, all of your debts are supposed to show under the entry for each debt that they were discharged in bankruptcy. Your debt-to-income ratio is much improved because you have no debt. Thus, as long as you have income to support yourself, you probably look better to a creditor after a bankruptcy than you did before you filed. You should check with a credit expert or banker regarding the effect on your Beacon or other credit score.

If you repay the mortgage loan payments, car payments, rent payments or other obligations on time after you file bankruptcy, then that helps repair your credit (you may have to force a mortgage or some other creditor to report debts you have not reaffirmed, but that is possible and I will show you how).  I cannot stress how important this aspect is if you want to repair your credit. It is easy to say you hit a bump in the road and had to file bankruptcy, but if you don’t look like you can handle credit after it is over, you eventually will have a hard time convincing people to give you another shot.

I assume that you will be turned down for loans, have to pay a higher interest rate for some loans and that you may face other negatives because you have filed bankruptcy. Several years ago I posed the question of what type of “bad” mortgage should my clients expect  to a mortgage broker friend of mine. She indicated that bad was maybe 10% at a time when great credit might get you 6%. I’m not sure how the collapse of the subprime market will affect all of this.

I do not keep statistical data on how bankruptcy effects my clients, but I have been here since 1989 and have filed close to 3000 bankruptcies. My local community has 50-150,000 people, depending on whether you are looking at the city or the county. I see my former clients in church, at the grocery store, at fundraisers, political events, cocktail parties, just walking down the street, at the gas station, and at my children’s schools. I have had them treat me in the emergency room at the hospital and help me in the checkout line. Sadly, I see a few of them years later in my office again. My point is that I have had an opportunity to interact with former bankruptcy clients from all walks of life in various situations and ask them how things are going.

Most who don’t have employment problems are able to get homes pretty fast. Most usually cannot borrow any money until the discharge date. The discharge date, or the date the debts are wiped out in a bankruptcy, is important to your future creditors because if, for some unusual reason you are not granted your discharge and your old debts are not wiped out, then you certainly will not be able to afford a new debt. The rule of thumb used to be that you could get a house within two years after the case has discharged.

I STILL have clients who are getting loans to pay off their chapter 13 bankruptcies, so I do not think that bankruptcy kills your ability to obtain financing.

Debtors have been able to get a car the day after discharge for years, it seems. I have had clients show up at their meeting of creditors a month after they filed bankruptcy with an unsolicited, pre-approved credit card sent to them because they filed bankruptcy (I have not had this happen recently but I am sure I will start seeing it again). The obvious reason creditors will lend money to someone who has filed bankruptcy is because they cannot file bankruptcy again, for 4-8 years, depending on the type of bankruptcy any second case would be. It may seem illogical and bothersome to some, but the marketplace seems to say that you are a better credit risk after filing than before filing.

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