Last Updated: August 25, 2011
The last word anyone with financial problems wants to hear is “bankruptcy.” But considering how the process can provide much-needed relief to people who are buried beneath a mounting burden of bills and debt, the perception of bankruptcy is often much worse than the reality.
“While filing for bankruptcy certainly has negative and lingering implications, for many people it is a step toward regaining control of their lives and gaining a fresh financial start,” says Stephanie Osterland, a counselor at GreenPath, a nonprofit credit counseling agency in Farmington Hills, Mich. “It can help provide a sense of peace and relief. It really is like starting at square one. For some people, that’s the best option.”
By definition, bankruptcy is a legal proceeding in which the U.S. Bankruptcy Court discharges an individual or business from their debt obligations, either wholly or in part. The process typically entails the restructuring of a person’s debt via a settlement between the person and the entities to which he or she owes money. The person may be required to sell certain assets to cover debts in exchange for creditors agreeing to take less than the full amount owed.
In tough economic times, bankruptcy is an unwelcome fact of life. In 2010, consumer bankruptcy filings totaled more than 1.5 million in the U.S., according to the American Bankruptcy Institute. Personal bankruptcy filings generally fall into two categories: 1) Chapter 7 bankruptcy cases that involve the sale of assets by a court-appointed trustee, funds from which are used to pay creditors; and, 2) less common Chapter 13 cases, in which the debtor, creditors and the court agree on a plan by which the individual must repay debts over a span of three to five years. In either case, consumers are required to complete a court-certified financial education course before their debts are discharged.
For all its far-reaching implications, filing for bankruptcy is more of a last resort than a first option. It negatively impacts one’s credit rating and remains on a person’s credit report for 10 years. It also significantly limits a person’s ability to get a credit card, mortgage or any other kind of loan. It can even make it harder to get a job.
That is why, according to Osterland, it is vital to get counseling from an objective debt/bankruptcy expert at a non-profit or government agency before deciding whether to file. Additionally, beware of for-profit scammers masquerading as bankruptcy relief experts.
If other options have been exhausted, there is no relief in sight and bankruptcy is deemed the most viable route, the process itself typically lasts three to six months, according to Osterland. Depending on the situation and the state in which the person resides, the process can be complicated. So while hiring an attorney is not mandatory, it is “highly recommended,” she says.
The bankruptcy process can be humbling, frustrating and draining — both emotionally and financially. Besides counselors and attorneys, rely on family, friends and peer support groups during the process, suggests Osterland. Stay organized, stay positive and remember, relief from collection calls and wage garnishment is in sight.