Bankruptcy: Financial Suicide or Fresh Start?

There are lots of things that you can do to commit financial suicide, especially when you live in a state with a high cost of living like California. If you do too many of them (or any of the others not listed in that linked article) you can find yourself staring down the barrel of potential bankruptcy.

For some, declaring bankruptcy is the ultimate financial mistake. It’s easy to understand why people would see it that way: it stays on your credit report for years and years — longer than most financial missteps.

It is also usually included in background checks. You’re required to disclose your bankruptcy on applications for everything from housing to jobs. If you aren’t careful it can haunt you for the rest of your life. This is especially true for people who live in areas like Silicon Valley (and the outlying cities that surround it) where, in spite of the bubble bursting, people (even those who are well meaning) still have a tendency to judge others’ worth based on their financial health.

Still, for some people it is an unfortunate necessity. If you’re pretty sure you are one of those people, here is what you do:

1. Talk to a Financial Counselor

Be careful here. California — the Bay Area in particular — is filled with companies who promise to help you fix your credit but charge you an arm and a leg and then leave you financially stranded. It’s important to take the time to find the non-profit credit counselors out there who specialize in helping people just like you avoid having to declare bankruptcy. The counselors who work in these non-profits can help you take an objective look at your situation and figure out which course of action is healthiest for you and your future. These meetings are almost always free so there’s no reason not to go.

2. Find a Lawyer

Finding the lawyer is simple enough. Make sure, though, that you search locally since your bankruptcy hearing will need to be in your own city or county. Someone who lives in San Jose, for example, would want a San Jose bankruptcy lawyer who is familiar with all the local ordinances and business codes and can help with debt consolidation.

IMPORTANT: Do not sign any contracts until you’ve met with and checked out as many bankruptcy lawyers in your area as possible. Take advantage of free consultations and online review sites like Google Reviews, Yelp, etc. Talk to other people you know who have declared bankruptcy and find out who they used or didn’t and why.

3. Find Support

As soon as you decide to declare bankruptcy people are going to come out of the woodwork with all sorts of reasons why you need to reconsider or why you need to choose a different lawyer. You’re going to spend a lot of time feeling forced to defend your decision.

It can be helpful, in times like these, to seek out others who have been where you are. Remember; you’re living where Silicon Valley skyrocketed and then crashed. There is probably at least one bankruptcy support group in your area that you can join. Finding people who have been through what you’re going through who will help you deal with the stress without second-guessing your decisions — it’s the key to getting through this time in your life.

4. Work with a Financial Professional

You can go back to your credit counselor when you’re ready to start rebuilding your financial life. If, for whatever reason, you don’t want to meet with your credit counselor, talk with someone at your local bank or credit union. Banks and credit unions have people on staff whose whole jobs are to help people like yourself set up and follow budgets, rebuild credit, etc. Mine these professionals for all they are worth!

Finally, understand that there is no shame in declaring bankruptcy — especially if you’ve done everything you can to avoid it. What’s important is that you’re working to build a healthy financial future.

Photo Credit: Kevin Dooley

Comments

  1. 1

    says

    Hi Len. Great post. Here in Canada the bankruptcy will stay on your credit report for 7 years. Banks as a rule won’t look at you for around 2 years. That being said it does vary from bank to bank. I used to be a loans officer. The credit agencies have instituted a second set of numbers on your report. Lets say your report shows a very respectable 720. What most people don’t know that number represents the risk of the person with your credit circumstances, going bankrupt. So it would be 1 in 720. The second number say is 650. That number tells the lender which direction your credit situation trending up or down. This all ties in to the interest rate charged. Love reading your blog. Keep up the great work.

  2. 3

    Renee B says

    I think an important caveat to consider when filing bankruptcy is the impact is has on OTHERS….not just what it does to you. You are not paying back debt that you agreed to pay, and that, in turn, hurts somebody else. In actuality, it’s consumers like myself that end up paying for other’s poor judgement. Retailers, or whoever you “stiffed”, end up raising the price of their goods/services to cover what other’s didn’t pay.

    • 4

      Len Penzo says

      Great point, Renee! In the old days, when it was a lot easier to declare a Chapter 7 bankruptcy, a lot of folks abused the system; many people who could have paid off their debts refused to do so simply because they wanted to avoid the financial austerity that would have entailed. While there are still instances of abuse, that’s not so much the case today.

      • 5

        says

        Len, that was that rationale used for the change in the bankruptcy laws in 2005. Subsequent to the change in the law, the burdens placed on people and their lawyers multiplied – all in the name of curbing said abuses. That increase led to higher legal fees, effectively closing the doors of the bankruptcy courts to more people living on the financial edge as is.

        As a testament to the lack of abuse found in the system, in 2013 the U.S. Department of Justice formally ended the random audits of bankruptcy filers (http://blog.nolo.com/bankruptcy/2013/04/24/u-s-trustee-suspends-random-audits/).

        People file for bankruptcy as a last resort, often after they’ve gone through credit counseling and tried to settle their debts with their creditors. In doing this sort of work for 18 years, I can count on one hand (and have fingers left over) the number of my clients who have been happy to be filing for bankruptcy.

        • 6

          Len Penzo says

          Thanks, Jay. I appreciate your comments. I never meant to suggest that people were happy about filing.

          Of course, everyone’s experience is going to be different. My wife, who was a bankruptcy paralegal for almost a decade before she finally quit to raise our kids, says she handled plenty of what she believed to be questionable filings over the course of her career.

  3. 8

    says

    Len – Yes, living in California does make it tougher to stay above water. The vultures are out there to take even more money you don’t have because you’re desperate. A money coach can help when you don’t qualify for bankruptcy, or could work instead of a credit counselor to address the problems and make an action plan to fix it. Great post, and you bring up great steps that really make sense for someone who could be feeling a bit panicky.

  4. 9

    says

    I’d try to avoid bankruptcy as much as possible. True, like the title of the post suggests, you start with a clean slate, but it has many many and still many repercussions following it.

    Even if one declares bankruptcy or talk to a credit counselor, it’s your own mindset and your own attitude towards spending and savings that will help you in your financial life or will once again bring you to the brink of bankruptcy.

  5. 10

    Debt getting out of it says

    I have a joint checking account with my domestic partner and she is heavily in debt. I used most of my moms inheritance to get out of most of mine. She is thinking of filing bankruptcy. Should I get out of our joint checking account and get into my own account? I have been watching my credit score grow. It is still poor but it is growing.

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