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Does Bankruptcy Ruin Your Life?

Popular culture offers plenty of myths about filing for personal bankruptcy, chief among them that bankruptcy ruins your life. The truth about bankruptcy, unsurprisingly, is much more complex than that. In fact, for most bankruptcy filers truly in need of bankruptcy protection, bankruptcy offers relief from debt and a chance to start over financially.

Here's a closer look at some of the ways bankruptcy affects a person's life, for better and for worse.

Bankruptcy's Effect on Life & Finances

  • Creditor calls stop: As soon as a person files a bankruptcy petition with the court, a legal protection called the automatic stay takes effect. This protection prevents creditor contact of all kinds, including calls, mailings, collection attempts, repossession and foreclosure. The automatic stay remains effective for the duration of the bankruptcy case, which translates for most filers to a period of much-needed "breathing room."
  • Repayments begin (in Chapter 13 bankruptcy): Those who file for Chapter 13 start making payments to their creditors and continue to do so for a period of three to five years. Those who can afford Chapter 13 often find it a satisfying way to repay their debts without the stress of constant creditor contact.
  • The liquidation sale occurs (in some Chapter 7 cases): Those who file for Chapter 7 bankruptcy may have their non-exempt property sold to raise money to repay creditors. Chapter 7 filers do not have to adhere to a repayment plan and most do not even have any assets eligible for the liquidation sale.
  • Filers complete the financial management course: This mandatory course is designed to help filers improve their relationship with money and credit in their post-bankruptcy life (not to ruin that life, as the rumors go).
  • Filers get a discharge from debt: At the end of both Chapter 7 and Chapter 13 cases, filers receive a bankruptcy discharge. This court order officially ends the case and eliminates any eligible unsecured debt. In other words, filers are not legally obligated to pay any debt discharged by the court.

Bankruptcy on Your Credit Report

One reason some people may think bankruptcy "ruins" lives is because it remains on the filer’s credit report for ten years. But:

  • The impact of the bankruptcy filing decreases as time passes and filers add positive credit actions to their reports.
  • Those who need bankruptcy protection usually don’t have very strong credit to begin with.
  • Bankruptcy’s financial management course may provide filers with the tools they need to create strong credit profiles in their post-bankruptcy lives.

For more information about bankruptcy and your life, please fill out this form for a free consultation with a bankruptcy lawyer near you.