It common for people to think they should do everything in their power to avoid filing for bankruptcy protection. However, according to a report by the Federal Reserve Bank of New York (FRBNY), this is often a very costly mistake.
Businesses get it. They understand that by filing for bankruptcy, they can reorganize the entity’s debt and improve its finances going forward. In fact, when airlines file for bankruptcy their stock typically goes up and the company’s leaders are praised for being proactive.
For individuals, however, filing for bankruptcy is commonly viewed as a financial failure. Banks and lenders want you to believe that you will never qualify for credit again after a Chapter 7 or Chapter 13, but this simply is not true. It is time for people to stop believing the myths surrounding the bankruptcy process and understand how beneficial a filing can be for them.
According to the FRBNY report, individuals who sought debt relief by filing for bankruptcy qualified for more new lines of credit than those who were avoiding a filing and continuing to struggle financially. In fact, the study determined that people who didn’t file bankruptcy were described as insolvent. The FRBNY report states.
For each quarter, we present the average number of new unsecured accounts four quarters later for individuals who become insolvent in that quarter but will not go bankrupt, compared to individuals who go bankrupt in that quarter. Clearly, individuals who do go bankrupt open a larger number of new unsecured accounts. Since the number of inquiries is very similar across the two groups, this outcome is not driven by difference in demand for new accounts, but rather by difference in access to credit.
In other words, the myth that filing a bankruptcy results in disqualifying you from accessing credit in the future has been discredited. In fact, many of our clients report that soon after receiving their discharge they started receiving credit offers again.
Additionally, the report indicates that bankruptcy debtors see an improvement in their credit score over time, when compared to those who continue to struggle financially. By eliminating their debt and working to rebuild their credit, individuals who file bankruptcy can experience a dramatic increase in their credit rating.
Finally, by avoiding bankruptcy, most people start to live off of exempt assets such as their retirement savings. Sadly, when these funds run out and the person still must file for bankruptcy, they have lost their 401k that would have been protected if they had filed for bankruptcy in the first place. In other words, they could have emerged from their case without debt and with their retirement savings still intact.
If you are overwhelmed by your debt and wondering if a Chapter 7 or Chapter 13 filing is the right choice for you, let us help. Don’t be misled by the myths and misunderstandings about bankruptcy! Schedule an initial consultation and get answers you can trust.
If you are interested in learning how filing a bankruptcy case can benefit you, contact Levitt & Slafkes, P.C., at 973-323-2953. You can also reach us by filling out our online form. We represent debtors in Chapter 7, Chapter 13 and Chapter 11 filings. Let us help you get the fresh financial start you need today.