Let’s Talk About the B-Word
Bankruptcy.
Does that word send chills down your spine? Give you heart palpitations? Make you think about certain politicians who seem to use it as a get out of jail free card? All fair, but the truth of the matter is that most people don’t really understand what it is or how it works. And, unfortunately, it is one of those financial topics that has become so taboo in our society that it can be hard to figure out the truth about it.
Next week the newsletter will focus on the short and long term repercussions of filing for bankruptcy. Today we’re going to start with the basics: 1) What bankruptcy is (and is not) and 2) When it may make sense for you.
Bankruptcy is one option in getting debt relief. Individuals and businesses can both declare bankruptcy, but the legal ins and out for each are different. I’m going to focus on personal bankruptcy today, but if you want to learn more about business bankruptcy, shoot me an email and I’ll add that to an upcoming newsletter!
The two most common types of personal bankruptcy are Chapter 7 and Chapter 13.
CHAPTER 7 BANKRUPTCY:
Known as a “straight” bankruptcy
A federal court trustee supervises the sale of your assets (things you own)
The proceeds from the sale go to paying your creditors
The debt that is still owed after the sale is forgiven, or discharged
CHAPTER 13 BANKRUPTCY:
The court and your lawyer negotiate a repayment plan (this usually lasts for 3-5 years)
After you complete the 3-5 year plan then whatever debt you still owe is forgiven
You get to keep your assets
Unfortunately, not all debt can be forgiven through the bankruptcy process. Debts that can’t be forgiven through bankruptcy include:
Court ordered payments (i.e. child support) or fines
Most student loan debt
Government fine
Federal taxes
Any debt that is reaffirmed during the bankruptcy process
Okay, now that you know the nitty gritty basics, the real question is: Is bankruptcy the right choice? And, not surprisingly, that really depends. Bankruptcy doesn’t work if the debt that you are overwhelmed with is one of the non-forgivable types. It also isn’t something that will be easy or quick. The process can be extremely tedious and time consuming, not to mention emotionally charged. I never recommend looking into bankruptcy unless you’ve already looked into all of your other options. Other options to exhaust first:
Make sure you know what you’re dealing with first. So often we are scared to know our own money truths and therefore don’t take the best actions to fix the problem. Not sure how to organize this? Check out the Know Your Numbers template on our website!
Call all of your creditors and ask for help. It doesn’t always work, but when it does it can be a game changer.
Look into personal loans and balance transfer cards to try to lower your monthly interest payments and make your debt more manageable.
Reach out to friends and family to ask for a low or no interest loan to help relieve you of the highest interest debt. This is absolutely not an option for everyone either because of the financial situation of their loved ones or because of inevitable emotional baggage that would come with a friends and family loan.
Make sure your overall spending is in line with your financial goals. I also encourage clients to use a Money Diary for at least a month to determine how you already spend money and then decide whether or not that spending is right for you. We have our own fancy Money Diary here, but you can also use pen and paper or make your own spreadsheet.
Coaching/counseling to get expert help on how to eliminate debt. Curious about working with us? Reply to this email, schedule a free consult call or DM us on instagram.
If you’ve exhausted your other options, bankruptcy may be the right choice, but I can’t stress enough that it shouldn’t be taken lightly. Next week we’ll go into short and long-term repercussions of filing bankruptcy, which may help you make a decision.
I know this is a heavy topic (thanks for reading to the end!), but these are heavy financial times and we, collectively, must gain literacy around the difficult financial work that needs to be done.
XOXO
P.S. This topic is in the newsletter because an amazing reader (like you!) replied to a past newsletter and requested it. In fact, most newsletter topics are actually from reader requests. If you ever have a financial topic you’d like to learn more about, please don’t hesitate to reach out!