You see the advertisements everywhere. Get out of debt now! Free bankruptcy analysis! Erase debt! These ads make bankruptcy sound like the quick, painless way to make all your bills go away, so you can get a fresh start. But does bankruptcy solve all your financial problems? Or does filing for bankruptcy only give you a new set of problems?
Many people who have filed for bankruptcy would tell you that the latter is true – that bankruptcy causes more problems than it solves. In fact, most people who file for bankruptcy say later that they wish they had found some other way to deal with their money problems.
Many writers have bemoaned the new bankruptcy laws and how they make it harder for people to get rid of their debts. The truth is, bankruptcy was never such a hot deal in the first place. If you’re looking for a way to throw up your hands and give up, bankruptcy isn’t the answer -- and it never was. You have too much paperwork to deal with now? You haven’t seen anything until you have to deal with all the paperwork of a bankruptcy. You want your creditors to go away? They will, for now. But they won’t be lining up to give you credit afterwards, either. You are embarrassed and tired of the shame of being behind in your bills? Bankruptcy is a public procedure. You’ll have to appear in court and face your creditors – sometimes face to face. Bankruptcy notices appear in the local paper. And of course bankruptcy can’t help with any new bills that come after the bankruptcy date. Bankruptcy is filed as of a certain date. It can take months or years for the bankruptcy to be settled, and by that time, you may be deep in debt again.
For one thing, bankruptcy won’t get rid of all your bills. It seldom erases back taxes. It won’t get rid of your mortgage loan or your car loan. It won’t erase past or future child support payments. You can’t generally use bankruptcy to get rid of student loans.
What you do get rid of when you file for bankruptcy is a lot of control over your finances. Before you file for bankruptcy, you have some measure of financial privacy, and you are the one who decides where your money goes. Once you file for bankruptcy, you have little say over what gets paid and when. Everything you own must be accounted for, and some assets may be sold. The court, not you, decides who gets what and when.
The biggest problem with most bankruptcies, however, is that they don’t solve the underlying problems. If you couldn’t live on your pay before, you won’t be able to live on it after the bankruptcy – especially if the only credit you qualify for after the bankruptcy carries high fees and interest rates. If you have a problem with credit cards, that won’t go away. Nothing has really changed. Many people who file for bankruptcy find themselves in just as much financial trouble, if not more, a few years later. They discover the solution is not bankruptcy. Any permanent solution to their money woes must include a plan with higher income, lower expenses, or both.
Sometimes, bankruptcy may be the best remaining option. Bankruptcy may be a good idea as a last resort; for example, if your debts are the result of a one-time disaster, such as a failed business or catastrophic medical expenses, or you are liable for an insurmountable debts that belonged to someone else, such as an ex-spouse. In most cases, you are far better off using proven debt reductions strategies -- not filing for bankruptcy.