Find out if bankruptcy is the right move-plus, 5 myths to ignore.
Money Girl
244 MG Should You File Bankruptcy?
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Thanks for downloading the Money Girl Podcast. I'm Laura Adams. If you've ever been over your head in debt, you may have wondered whether you should file for bankruptcy. I'll tell you the advantages and disadvantages of declaring bankruptcy, the truth about five common myths, and when bankruptcy might be the right decision for you. Bankruptcy is a system of federal laws that allows individuals and businesses to get relief from debts, so they can make a fresh financial start. It was created to help an honest but unfortunate debtor forge a new future without pressure from creditors trying to collect pre-existing debts. The most common types of bankruptcy for individuals are called Chapter 7 and Chapter 13. A Chapter 7 bankruptcy liquidates all your non-exempt assets to pay off creditors. It's generally the best option when you have a large amount of unsecured debt, like medical bills and credit cards, and little income. A Chapter 13 bankruptcy reorganizes or adjusts your debt using a repayment plan. It's the best option if you have income but want to avoid foreclosure of your home or need time to catch up on outstanding debts. The immediate advantage of filing bankruptcy is what's called an automatic stay, which puts your creditors on notice that they have to stop trying to collect money from you. The stay prohibits creditors from calling you, sending collection letters, filing lawsuits, garnishing your wages, or seizing any of your assets, except in a few cases, such as in the collection of alimony and child support. If you have a successful bankruptcy case, the court will issue a discharge of certain debts, which means you won't have to repay them. Making your creditors disappear sounds like a dream come true, right? But filing bankruptcy has a dark side, except in rare instances, it doesn't discharge debts from mortgages, student loans, taxes, alimony or child support. Additionally, you can lose certain non-exempt property in a bankruptcy because the court may order it to be sold. Declaring bankruptcy can also be devastating to your credit score. Granted, your score may already be low if you're behind on your bills or loan payments. Once you file bankruptcy, the National Credit Reporting Agencies are required to show it on your credit report. A Chapter 7 bankruptcy stays on your credit report for 10 years, and a Chapter 13 shows up for 7 years. Even if you swear off debt forever, having a bankruptcy on your credit report can hurt more than just your ability to qualify for a future loan or credit card. A company or individual who evaluates potential customers, tenants or employees by reviewing their credit can use a bankruptcy against you. For instance, they can raise your insurance rates, increase your security deposits, deny your rental application, or turn you down for a good job. It's important to separate fact from fiction when it comes to owing debt and filing bankruptcy. Here are five common myths that are decidedly false. Myth number one, you can declare bankruptcy by saying it in public in an episode of The Office when Michael Scott's finances are tight, he screams "I declare bankruptcy!" Then he goes to his office to cut up his credit cards, and his accountant, Oscar, says "Hey, I just wanted you to know that you can't just say the word bankruptcy and expect anything to happen. I didn't say it, I declared it still." Of course, Oscar is right. Filing for bankruptcy typically requires paying a fee, completing credit counseling, and submitting a bunch of legal paperwork and financial disclosures. Myth number two, you can only file bankruptcy once. You can definitely file bankruptcy more than once in your life. In fact, you can receive a discharge from a Chapter 7 bankruptcy. That's the kind that liquidates your assets once every eight years. You can receive a discharge from a Chapter 13 bankruptcy. That's the kind that creates a payment plan every two years. Myth number three, a bankruptcy hurts your spouse. If you're married, filing bankruptcy doesn't affect your spouse's credit. However, if you're struggling to pay debt that's in both of your names, then you should file bankruptcy together. Otherwise, creditors will simply demand payment for the entire amount from the non-filing spouse. I love learning, and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science, and social studies. Ixcel has interactive practice problems for topics from pre-K to 12th grade, and everything is organized by grade and subject. As kids practice, they get positive feedback, awards, and explanations for wrong answers. 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Their workware isn't just about looking good. It's about performing under pressure and lasting through the toughest jobs. Head over to Dickies.com and use the promo code Workware20 at checkout to save 20% on your purchase. It's the perfect time to experience the quality and reliability that has made Dickies a trusted name for over a century. Earning your degree online doesn't mean you have to go about it alone. At Capelli University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals, to academic coaches who can help you form a plan to stay on track, we care about your success and are dedicated to helping you pursue your goals. Going back to school is a big step, but having support at every step of your academic journey can make a big difference. Imagine your future differently at Capella.edu. Myth number four, you can go to jail for owing money. No matter what anyone says, especially an aggressive debt collector, it's not against the law to owe money. There is no such thing as debtors prison in the United States. Creditors can sue you, take you to court, lean your property and garnish your wages, but they can't send you to jail. You can only be arrested if you commit a crime, like fraud, hiding property to avoid a judgment, or refusing to pay income tax. Myth number five, bankruptcy is expensive. The filing fees for Chapter 7 and 13 bankruptcies vary, but aren't more than $300. The real expense is hiring an attorney, which could range from $2,000 to $4,000, depending on the firm and the type of bankruptcy you choose. You can file bankruptcy without counsel, but I don't recommend it because the laws are complicated. While this sounds pricey, in some cases, you could rack up much higher expenses in interest and penalties on debt that you have no ability to pay. In the long run, that could be more harmful to your financial future than declaring bankruptcy. If you can reduce your debts or work out a favorable payment plan with creditors, that's always a much better option than filing bankruptcy. First, you should explore alternatives such as credit counseling, financial coaching, negotiating with creditors, credit card consolidation, loan modification, and loan refinancing. Consider bankruptcy when you can't meet your financial obligations because you've been out of work for an extended period and have no unemployment income or savings. You have delinquent taxes. You have a home that's nearing foreclosure. You have wages that are being garnished. You have pending lawsuits for delinquent bills. Everyone's situation is different, so be sure to seek professional help to carefully evaluate your options when you're dealing with serious long-term financial problems. When you visit smartmoves2growrich.com, you can connect with me on Facebook and Twitter, sign up for email updates, and find out how to work with me for one-on-one financial coaching. To make sure you never need to file bankruptcy, be sure to read my book, Money Girl Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don't. It's available at your favorite bookstore in print or is an e-book for your Kindle, Nook, iPad, PC, Mac, or smartphone. You can even download two free book chapters at smartmoves2growrich.com. I'm glad you're listening. To change. That's all for now. Courtesy of Money Girl, your guide to a richer life. Calling all future shapers and dream chasers. MSU Denver is a place that meets your pace. We have drive and dedication to help you reach your destination. We're a school that works for you and with you at every step. Online and on campus learn with faculty and peers to forge a career. Tomorrow can't wait. 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