Filing Bankruptcy: Is it worth the fresh start?

Posted on Dec 10th, 2018 | Credit, Debt

When Antonio can’t pay his debt in Shakespeare’s¬†Merchant of Venice, the creditor asks for a pound of flesh. Nowadays if you’re dangerously in the hole, you can’t give up a hand but you can file for bankruptcy. If your debt is discharged, creditors can no longer collect on those debts, and you’re no longer liable to repay them. But it’s not as simple as it sounds, and filing for financial freedom carries some serious consequences.

Example One: Melody

Melody from Michigan had $87,000 in debt from making purchases, shifting jobs and setting unrealistic goals for getting it paid off. When she filed for bankruptcy at age 27, she was making about $40,000 annually.

“I had a lot of small bills that crept up on me,” says Melody. “Most of my debt, I just simply did not pay‚Ķ sometimes I didn’t have the money, and other times I just wasn’t being responsible.” Melody had financed three cars: Only one of them was her own. The other two were financed for other people, and one of them was later repossessed.

Despite her post-bankruptcy fresh start, life after debt presented some challenges. It was harder for Melody to get credit, but she used what was offered to establish and maintain a positive credit history.

Example Two: Claudia

Claudia, a Florida real estate agent, realized she had too much debt after her divorce reduced her income. On top of her car payments and credit cards, she had five different mortgages from real estate investments.

“With the recession and the economic situation, and of course the divorce, I was not able to keep the payments,” says Claudia.

She also was helping to pay for her mother’s cancer treatment, and she was running dangerously low on cash. Almost $200,000 in debt, she decided to file for bankruptcy.

“In the beginning, I felt bad because I’m a person that likes to keep my responsibilities,” Claudia says. “But under the circumstances, I was forced to do it. After the bankruptcy was discharged, I felt relief. No more phone calls, no more pressure and, the most important, no more debts. That gives me hope for a new beginning.”

Claudia had looked into other options besides bankruptcy, but none of them seemed viable: the debt was just too overwhelming to manage.

Since filing, it’s been harder for her to get loans and credit cards, and finding a place to live was a challenge. She needed several months’ worth of deposit just to secure a rental within her budget. To save money, Claudia was able to get a cosigner for her rental. “I have two credit cards with small credit limits,” she says. “Little by little, I’m establishing credit again.”

Young Debt

For Stuart, a sole practitioner of law in Florida, about a third of his bankruptcy cases involve people under 30.

Stuart says that bankruptcy really does offer a fresh start, since you can swing from being seriously indebted to being completely debt free. However, despite the availability of bankruptcy, he encourages young adults to be careful when it comes to their credit.

“Avoid cosigning a debt with a friend,” says Stuart. “Car loans are the most common, but I have had several clients in the past year or so that actually cosigned for a student loan. If the friend defaults on the payments, the cosigner is on the hook and out of luck.” Student loan decisions should be made thoughtfully since they are not usually forgiven with bankruptcy.

It’s important to take steps to improve your financial habits and rebuild credit if you do decide to file: “The most typical challenges people face after bankruptcy are obtaining credit at low interest rates and renting apartments,” says Stuart.

The best way to get started is to use just one credit card and pay the balance in full every month. Using this method, he’s seen clients’ credit scores recover. “This allows your score to begin to rise again,” says Stuart. “If people go about re-establishing credit carefully, their credit score is usually higher within a year than before the bankruptcy.”

In short, bankruptcy isn’t the end to your credit rating as some people believe. Even though the initial filing knocks your score down, it also wipes away many debt obligations, and the post-bankruptcy credit “track record” helps you to gradually obtain credit at more reasonable rates.