Thinking bankruptcy was the only answer to paying off debt, we willingly accepted bankruptcy myths as truth and are living the consequences even 7 years later.
One blustery evening in the Fall of 2006, my husband and I sat on the cold leather couch in a bankruptcy attorney’s office, snuggling our newborn son while our 3 year old daughter played at my mother’s house.
My hands were like ice as fear and embarrassment griped my heart. I could not believe our spending habits had finally driven us to this point where we felt bankruptcy was our only option, but I felt a small flame of hope kindle in my heart when the attorney’s assistant called us into his office.
The television commercials and the attorney’s website encouraged us that this was a real solution. A way to start over. A way to finally live without the pressure of creditor phone calls. An escape from threatening letters.
Settling into a stiff office chair across the desk from this stoney-faced man, I hugged the baby closer with one arm and tightened my grip on my husband’s hand with the other. The attorney asked for our bank information, debt statements, and a copy of our budget.
His eyes glanced across the figures and then came to rest on my face. “You need to cut your budget, starting with electricity and groceries.”
I stuttered and stammered, explaining that all frivolous expenses like cell phones and cable television were already removed from our budget. How we had even given our cats away to good homes. And, with tears brimming in my eyes, I asked him if he knew the cost of electricity in our city or the price for a pack of diapers.
With great finality, the attorney closed our file and said, “Unless you make some cuts to your budget, there is not a judge in our county who will approve your request to file bankruptcy.”
As we left the attorney’s office and solemnly walked past other couples waiting for their turn in the executioner’s lair, my hope turned to desperation and we decided to proceed with Chapter 13 bankruptcy regardless of the cost.
5 Bankruptcy Myths
I am not naive. I actually consider myself to possess an extremely logical mind. My husband and I did not walk into bankruptcy without serious research. But, in hindsight, I think we only accepted what we wanted to hear. We accepted certain bankruptcy myths as fact.
Bankruptcy offers a fresh start.
Our attorney’s website and commercial promise a “fresh start,” and who wouldn’t like the ability to start over? We had over $176,000 in debt. Getting rid of it by going to court and having a judge pity us seemed like a dream come true.
The truth is… bankruptcy is ANYTHING but a fresh start.
A bankruptcy will remain on your credit report for 7 years from date filed but may remain up to 5 years after your bankruptcy is paid and complete. That is over a decade of having to explain to every car salesman and/or mortgage broker the details of your bankruptcy. Ten years of keeping your bankruptcy paperwork in the filing cabinet as a constant reminder of your darkest financial days.
Filing bankruptcy is inexpensive.
The cost of filing for bankruptcy starts almost immediately. We had to take a cashier’s check for $750 to our second meeting with the lawyer in order to pay attorney fees.
The truth is… The payment to start the process of bankruptcy can be as high as $1,500, and only a fraction of that covers the actual bankruptcy. You must pay filing fees, attorney’s fees, trustee fees, and much more just to apply and are not guaranteed the judge will approve your request.
Bankruptcy settles all debts.
When we filed for Chapter 13 bankruptcy, we knew our debt would be restructured but what we did not understand was that the repayment plan would exclude student loan debt and our mortgage. We also had to pay 100% of recent debt accumulated on our credit cards since we had decided to max them out (financing our Christmas gifts) prior to filing bankruptcy.
The truth is… Some items are best not included under bankruptcy. We could have structured the bankruptcy to include our home but the judge would have likely refused, leaving the bank to repossess our house.
Student loans are also not included within a bankruptcy settlement. Regardless of the amount you owe in federal student loans, these must be paid outside of the bankruptcy.
The trickiest part of the bankruptcy structure involves unsecured debt. Only a percentage of unsecured debt (such as credit cards) are owed to creditors once an individual enters bankruptcy. However, if you decide to go on a shopping spree prior to your bankruptcy court date, recent debt will be owed at a higher percentage and may be required in full. This debt is included under the bankruptcy but will increase the amount you pay monthly to the bankruptcy trustee.
The bankruptcy court takes everything you own.
Since we filed for Chapter 13 bankruptcy, we did not lose anything. We were asked to supply a document detailing what we owned, which wasn’t much since we were a one television family without jewelry, fancy cars, or any frivolous gaming or computer equipment.
The truth is… If you own valuable possessions such as additional real estate, more than one car per adult driver, expensive jewelry, or recreational vehicles, you may be required to surrender these to be sold and pay your debts. However, you will not lose everything.
We were even allowed to keep our minivan under the bankruptcy despite having it for less than one year. However, our attorney advised us to keep the minivan in the backyard with a lock on the gate until our bankruptcy was finalized to avoid repossession.
Bankruptcy is not your fault.
In a society were no one seems to take responsibility for their own problems, we readily blamed our creditors for extending our debt beyond what we could reasonably afford. We nodded along as we read that bankruptcy was created for good, hardworking people. We cheered when we even read a bankruptcy attorney’s website mentioning that bankruptcy was biblical because of the Old Testament mention of the Year of Jubilee when debts were released.
The truth is… The source of the “bankruptcy is not your fault” motto is a bankruptcy attorney. Of course, not all attorneys promote this bankruptcy myth but many do, and we need to accept that it just isn’t true. In our case, bankruptcy was our fault.
We filed bankruptcy because we wanted an easy way out of debt. Despite cutting all frivolous expenses from our budget, the fact remains that we created our debt. We chose to go deeper and deeper into debt, getting lines of credit to pay off credit cards only to run the balance back up on those same credit cards.
We chose to buy a home despite having a large debt ratio. We are the ones who decided to get a new-to-us minivan despite already having financial difficulties.
Our decisions included going out to eat instead of building a savings account. Using credit cards for date nights and Christmas gifts instead of creating an emergency fund.
Then, when medical bills and debt payments were beyond what we could afford, we filed bankruptcy as a means of escape.
Bankruptcy is NOT an Escape
But it was not an escape. In my opinion, it was a trap and one of the worst decisions we have ever made. A decision we still carry on our backs and on our credit reports despite leaving our bankruptcy early and paying off our creditors in full.
Before you consider bankruptcy, think about every other possible solution. Do your research away from the bankruptcy attorney’s website. Be clear that the source of your information is unbiased. And find ways to increase your income to have a way to negotiate with creditors on your own.
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