Declaring Bankruptcy has (historically) been the equivalent of being locked away in a Financial Jail. However, with the current and past economic crisis, it has recently become a more frequent financial trend. Historically, people who have filed for personal bankruptcy may have felt that they were locked away and waiting to be freed from a difficult financial situation. I did some research and found out that although declaring bankruptcy can be short term financial stubble; it does not have to be a fall into a long term financial black hole.
The short term effects of declaring personal bankruptcy on your lifestyle, your finances, and your future, are not as devastating as we have known them to be. If someone is considering declaring personal bankruptcy it is because their debts outweigh their income; and their current monthly income can no longer support their monthly debt obligations.
Before we decide to declare personal bankruptcy we should be aware that there are other options. As a first step in the bankruptcy process, we should make an appointment with a bankruptcy trustee. Based on our current debt obligations, along with our current monthly income, the bankruptcy trustee will determine if bankruptcy is the best option for us. If our monthly income can support it, the bankruptcy trustee may suggest that we file a consumer proposal; as opposed to filing for personal bankruptcy.
A consumer proposal negotiates our current debt obligations to bring down the minimum monthly payment, lower the interest rates, and in some cases forgive a part of our current debts. If our current income does not support the payments required by a consumer proposal then we will need to declare personal bankruptcy.
It is a myth that if we choose to declare personal bankruptcy we will lose all of our assets. Our retirement savings plans are not part of personal bankruptcy. All unsecured debts such as credit cards, loans, overdraft protection, and lines of credit will be included in a personal bankruptcy. Student loans are not able to be included in a personal bankruptcy. We are able to keep all of our personal belongings along with our household items.
Very often we will have to open a new checking account at a new financial institution where we do not have any debts. A new checking account should be opened prior to filing for personal bankruptcy because a credit check is often required to open a new bank account.
Filing for personal bankruptcy is a fresh start. While we are in bankruptcy we are not allowed to apply for any new unsecured credit and we may also be required to enrol in a minimum of two debt counselling courses.
Our bankrupt status will remain on our credit bureau for 7 years; it is not there for the rest of our financial life. Once our bankruptcy is finished, the next step is to start to rebuild our credit. This can be done by applying for a secure credit card with a low limit. The bankruptcy trustee will assist us with this.
Before we decided to file for personal bankruptcy, it is important that we fully understand the short and long term effects on our personal and financial life. Declaring bankruptcy is a setback but it is no longer the equivalent of financial exile.
Photo By Casey Serin
DINKS (Dual Income No Kids) Finance is a blog discussing personal finance for couples. While by no means financial experts, we own a variety of assets including real estate and stocks. We've both been up to our eyeballs in debt and have made tons of financial mistakes. However, we've both successfully retired that debt and we both do learn from our failings. We hope that our voice in this blog can help others in achieving their goals!
{ 3 comments… read them below or add one }
I don’t like to be judgemental, but it seems like there are two kinds of people who declare bankruptcy. The first type has had some unfortunate problems, like a layoff, illness or medical bills. The second type just simply doesn’t feel obligated to pay their bills. I know a girl who has declared BK three times, each time as soon as the seven years were up.
I know there is less of a stigma attached to BK now. But, I these type of people are undermining the laws that are designed to protect those who really need it.
Are you writing about bankruptcy in Canada? If this is for the U.S.A., the third paragraph is pretty inaccurate. Since the blog “owners” are supposedly from the USA, this is confusing.
Hi Kim…Are consumer proposals and/or credit counselling not available in the US?