The newspapers are littered with stories of celebrities going bankrupt while still living in big houses and collecting big checks. It’s easy to read these stories and assume that bankruptcy is an easy way out, and that no matter how bad things get, you can always just declare bankruptcy.
But as you might have suspected, it’s not quite that simple. These stories often hide the truth, and that truth is pretty scary. So, if you ever find yourself contemplating bankruptcy, whether for yourself or for your business, keep the following in mind.
It’s Not that Straightforward
There are several forms of bankruptcy, covering individuals, businesses and even municipalities. Some of these are very specific and complicated and if you have a company then you’ll need a business bankruptcy attorney just to wrap your head around them. For individuals, it’s an option between Chapter 7 and Chapter 13.
Both come with a long list of negatives but there are some noticeable differences. More importantly though these differ from many business bankruptcies that don’t impact heavily on an individual’s personal finances. Many of the stories you hear about entrepreneurs declaring bankruptcy and still living large are likely the result of carefully orchestrated business bankruptcies.
Chapter 7 will liquidate an individual’s assets in order to pay off debts, with remaining debts being written off. This is the most common form of bankruptcy and is typically more damaging, leaving the individual with very little. In Chapter 13, a person’s debts are restructured and renegotiated following an agreement with debtors, and they are not forced to sell everything.
Not Everything is Covered
Bankruptcy will help you to clear most of your debts, but not all debts are covered and this is true of both Chapter 7 and Chapter 13. Alimony/child support, and any government debt (such as back taxes) will not be covered and will continue to be owed.
Students loans will also typically remain, even though these account for a large portion of personal debt in the United States.
It Leaves a Lasting Impact
Bankruptcy will remain on your credit report for 10 years. This means that even if you get back on your feet after a couple years, you may struggle to take out a loan, get a mortgage or even take out credit cards. It’s a big black mark that remains for a very long time and does a lot of damage on the way.
It’s not Free
Ironically, while bankruptcy is undertaken as a last resort by people with no money, it’s not a cheap process and many debtors find that they simply don’t have the money they need to file. There are filing fees, attorney fees, credit counseling fees, and more.
Of course, if you’re heavily in debt, with interest payments coming out of your ears and with no end in sight, these fees might be worth the added burden. At least that additional burden won’t be there for long.