I invited a friend of mine to share his experience of bankruptcy. The following is a true story…
Hopefully, you’ll never have to face the decision of whether or not to declare bankruptcy. But for those of you who are in a situation in which it’s time to at least consider it, I can tell you from personal experience, it isn’t actually the end of the world, or the end of your financial future. Here’s what happened to me.
I was going to write a best seller. And it took time, commitment and money. My own spiral of debt wasn’t from overspending, but from under-earning. I was compiling a book of original writings by best selling authors, and I had an interested publisher. I was living in a place where jobs were scarce, and I was also in a graduate program. I also had an overconfidence in the success of the project, that touched on arrogance. I was certain it was just a matter of time before the book was finalized, a very nice advance was in my hands, and a promising future of related sequels would be rapidly approaching.
Unfortunately, the authors were much slower getting their chapters to me than I had anticipated, and suddenly there was a flux of several new books with a similar concept. The major publisher backed away, and without that I couldn’t hold together the project. It died. I was left with $33,000 in credit card debt and with over $1000 a month in credit card payments- nearly all of which went to the interest.
I moved, and got a low paying job, but I was far too behind to have a chance at catching up. Most of us have heard how Spike Lee made his first movie “Do the Right Thing” with $50,000 in credit cards. Unfortunately, for every success story with this risky approach, there are quite a few who are not successful, and one of those was looking at me in the mirror, asking”What the hell do I do now?”
There was no way out that I could see, and after having creditors laugh at me when I tried to make arrangements I could handle, which were quite a bit below their lower limits, and after several months of feeling a great deal of anxiety and pressure, I had to investigate bankruptcy.
As you may be aware, there are two main types of personal bankruptcy, Chapter 13 and Chapter 7. With Chapter 13 you get to keep your possessions (such as your house, your car, and other valuable property) and you make arrangements through the legal system to pay back a certain percentage of your debt to all your creditors over a few years (so that you might end up paying every creditor 20-50%, or more or less, of what you originally owed them). This is usually preferable to those with valuable assets they want to protect. Chapter 7 lets you write off all your debt (with certain exceptions such as child support and student loans) but doesn’t allow you to keep valuable property- all of which is usually sold and income is used to pay creditors (You may be able to keep your car and some other assets in some circumstances, so it’s worth checking out both options carefully to see which one is right for you).
In my case, I was leasing a car and had no other assets. So, I hired a bankruptcy attorney (The fee was $500) and went through the process. All my credit card accounts were closed, and all my debts were dismissed. I felt so incredibly relieved and free, to not have that ever increasing burden on my shoulders. To my surprise, the leasing company allowed me to keep leasing the car, and it even became voluntary, as the lease was no longer legally valid after the bankruptcy, but they would lose money to get the car back now, depreciated but with the lease not completed.
But there was one very real negative result of course: My credit rating became the lowest rating on the chart. And there was no way to avoid it staying that way for, at least officially, for the next 7 years. What I COULD control, was working during that 7 years to build up new credit history, and get new credit accounts, so that creditors during that time could see a responsible pattern, and consider granting more favorable terms, and so that once the bankruptcy fell off, my rating would be excellent again.
The simple steps I followed immediately after the bankruptcy was complete were to find reputable credit card companies that offer secured credit cards- These are credit cards that require you to pay a deposit which goes into a locked interest-bearing savings account. One of mine was $100 for a $300 limit, and the other was $200 for a $500 limit. After a year I began to be offered more cards, and even some high interest, yearly fee cards which required no security deposit. Of course the rates and fees are much higher for those with bad credit, but it’s imperative to begin to have credit relationships as soon as possible, and to be very responsible with them. After a couple of years, even though your bankruptcy is still on your credit score, creditors can also see you’ve been paying on time and handling your debt responsibly, and they can at their discretion offer you more credit, or credit with better terms, than you might expect to qualify for. You can also attempt to get credit from your bank or other financial institutions you might be connected with, (By the way, I recently got two nice checks in the mail- Apparently I had fulfilled the terms of the secured credit cards, since I automatically got checks for my original deposits plus interest. That to me was the final step in total recovery.
When facing bankruptcy, 7 years can sound like an eternity. But I am now on the other side, and during that time I was able to build up positive and responsible credit relationships with several creditors. I was also able to negotiate better terms, sometimes by simply requesting lower rates, and sometimes by stating I was closing the account because I had better rates with other cards. And now, my rating is above 700, and shows no negative items.
The whole process was quite a learning experience- one I hope you never have to go through. But if you are facing bankruptcy, or considering it as an option, what it boils down to is this:
- Keep in mind that it really isn’t the end of the world. Hey, Donald Trump has done it more than once.
- Before making any final decisions, carefully research what is the best option for you, try negotiating with your creditors directly (never ignore them) and consider meeting with an experienced and reputable bankruptcy attorney. They understand the system and it’s a relief to talk to one.
- If you do declare bankruptcy, once it is completed and finalized and you can begin to have debtors again, immediately get a couple of credit cards, even though you will likely have to pay a security deposit. Don’t accrue debt on them, but use them and pay the full balance monthly to begin to show responsible credit habits.
I can tell you, from being on the other side, bankruptcy wasn’t the end of the world. And I learned a lot through the process. If you ever have to face bankruptcy, take smart, responsible steps, and you will make it back to the land of financial opportunity.