"I thought I was the biggest thief in the world because I didn't make good on the loans I had taken," Cecilia Deal tells WalletPop about her 2008 Chapter 7 bankruptcy. "It was the worst. When you value honesty and sticking to a commitment and then you consider yourself reneging on that value when you file for bankruptcy, emotionally, it's really painful."
When Deal first lost her job, she contacted her creditors to see if she could work something out. "I was instructed to wait three months before contacting them again and told 'The reality is we won't work with you until you're delinquent.'"
Ultimately, Deal escaped her debts - a combination of credit card and home equity debt -- but she lost her home and even her self-confidence for a while. "My relationship with my fiance was strained. I was really lucky in that he still believed in me and didn't see me as a bad person for filing," she says. "I've seen how some spouses or families aren't very supportive and how much harder emotionally it is to go through."
It's a familiar story for far too many Americans, especially these days: They've reached the end of their financial rope, and they think they have no choice but to declare bankruptcy. If you're in this boat, the first thing you should know is that you're not alone: A staggering 158,000 Americans filed for bankruptcy in the month of March, a 35% increase over February numbers.
As this advice given out in a recent article shows, there are some people who will never be free of the debt they carry unless they file for bankruptcy. However, it's by no means the only option, and it's not a decision to be undertaken without exploring what bankruptcy would mean for your family -- for better or for worse.
"Make bankruptcy your last choice, not your first," cautions Gail Cunningham, spokeswoman for the National Foundation for Credit Counselors. "I think consumers need to really understand that bankruptcy is one of the most serious financial and legal decisions they can make."
If most of your debts are student loans, bankruptcy won't help you out much since student loans generally can't be discharged. Outstanding tax bills are another case where you're just going to have to bite the bullet and work out a payment plan; the IRS doesn't take "no" for an answer. However, if you're drowning in credit card debt, medical bills or loans taken out against a home that's now worth less than what you owe, bankruptcy might help you get a fresh start. But where do you start to get a fresh start?
Not a lawyer's office, despite what you might have been led to believe by bankruptcy-related advertising. "They should get some bankruptcy counseling before they see an attorney," advises Natalie Lohrenz, director of counseling at Consumer Credit Counseling Service of Orange County in California. Unlike a lawyer, many bankruptcy counselors will waive their fees if you can't afford to pay. Agencies approved by the Executive Office of the U.S. Trustees are the way to go; they're sure to have your best interests in mind. (Here's an online list.)
"Do it early," Lohrenz says. "There's no commitment, and the sooner you decide there's another alternative, the more options you have." A nonprofit credit counselor is more likely to offer some unbiased advice.
Lohrenz says when evaluating whether bankruptcy is the best path, you should add up all your applicable debts. It might be a big, scary number, but you'll need that information to rationally figure out your best choice. "The best way to look at it is, could you pay off the debt within five years?" says Lohrenz. While bankruptcy stays on your financial record for a decade, if you think you could have your debt under control in five years, you could be well on your way to rebuilding your credit score and reestablishing your financial life.
If you've decided filing for bankruptcy is your best choice, then you need to decide just what type of bankruptcy you should be filing. A Chapter 13 filing lets you keep more assets, but you have to have a source of income and adhere to a strict payment schedule and budget for living expenses for years before your debts are dismissed.
If you have no income at all, you'll need to file Chapter 7. This is both easier and harder in some ways. It's easier because it wipes out all your debts (except for the types mentioned above), but you stand to lose more. If you have valuables like antique furniture or fine jewelry, for instance, you'll have to surrender those items to put toward your debt, Lohrenz says. And depending on where you live and the amount of equity you have in your home and car, you could lose one or both of these if you file Chapter 7. Lohrenz says this is one thing many people who come to her seeking bankruptcy advice don't realize, and she's seen people lose both their vehicles and their homes.
If you need a car to get to work or school, it'll need to be pretty old for the court to let you keep it. Likewise, depending on whether you have equity in your home and how much, you could be forced to surrender your home. The latter is what happened to Deal, who had tapped out her home's equity and owed more than it was worth because of a bout of prolonged unemployment. If you think you'll be forced to surrender your home, you'll want to sock away some money before that happens so you can rent a place to live.
There are a lot of emotions that go into filing for bankruptcy. Paula Langguth Ryan wrote "Bounce Back From Bankruptcy" after filing Chapter 7 at the age of 21. Her mistake was being seduced by credit cards in early adulthood, she admits. "I used credit as an extension of my income." When she found herself too deeply in debt to make her minimum payments and her fallback plans -- getting a second job, borrowing money -- fell through, she was faced with the realization that bankruptcy was the only viable option.
Like Deal, Langguth Ryan says she had to wrestle with a lot of negative emotions. "Leading up to it, I was petrified. I had strong work ethics, strong values. It was very shameful, very embarrassing and very humbling," she says. After her debts were officially discharged in court, when her lawyer wished her luck and walked away, she realized she was on her own. As a result, she wrote a book to guide people through not only the legal details but the emotional and behavioral changes that people need to make to keep from falling into a spiral of debt again.
"I need to find a way to not find myself back there again," says Deal. "There's the practice of dealing with money like budgeting, securing your future through saving and making sure you're covered if you lose your job. Then there's the emotional relationship you have with money. I knew I understood the practice so I figured the issue I had was emotional. I actually sought out people who had a healthy relationship with money and sought out books to figure out how to look at money as a good thing and how to befriend the idea of making income and building wealth rather than looking down on it. That process went on, continues to go on even now."
The freedom from escaping her debts has been worth the pain. "Once the bankruptcy was over," Deal says, "there was a huge relief that I could finally start fresh. I could finally recover emotionally once it was done."
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