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J.R. Whalen: Here’s Your Money Briefing for Friday, December 30th. I’m J.R. Whalen for The Wall Street Journal. All this week, in our special series on how to get out of debt, we’ve highlighted solutions that financial professionals say can loosen the stranglehold that debt can put on your finances. But what if those solutions or any plan to get out of debt don’t work? For some people, they’re left with one last resort: filing for personal bankruptcy.
Natalia Brown: When someone’s already tried to minimize their debt, they’ve tried to budget; they’ve gone to credit counseling agencies or non-profits; they’ve tried debt resolution, and they’re still in a position where they cannot keep their heads above water.
J.R. Whalen: On today’s show, we’ll speak with Natalia Brown from National Debt Relief and the American Fair Credit Council about the process of declaring personal bankruptcy, but also the long-term harm it can do to your financial life. That’s after the break.
As we’ve heard throughout the week, there’s no quick and easy way to get yourself out of debt. And while financial professionals often recommend programs and services that can ease that process, there’s one path to being debt-free that stands alone and is seen as a last resort. Natalia Brown of the National Debt Relief and the American Fair Credit Council joins me to talk about the pros and cons of declaring personal bankruptcy. Natalia, thank you very much for being with us.
Natalia Brown: Thank you so much for having me. I really appreciate it.
J.R. Whalen: So, Natalia, when people think about personal bankruptcy, for a lot of them, it can seem like a scary thing or even a shameful thing. How do you think people should think about bankruptcy?
Natalia Brown: I absolutely agree with you. Bankruptcy can be very scary. They should really think about it as an option. I like to call it the last option. There are many alternatives before you get to bankruptcy, but it is another tool that anyone could use to get out of debt and resolve some of the stress issues that they’re having in relation to their debt that they are going through.
J.R. Whalen: So when might filing for bankruptcy be the right decision for someone?
Natalia Brown: It’s the right time when someone’s already tried to minimize their debt; they’ve tried to budget; they’ve gone to credit counseling agencies or nonprofits; they’ve tried debt resolution; and they’re still in a position where they cannot keep their heads above water. It might be related to the income that they’re making. They could’ve lost a job, or there might be some medical bills that impacted their ability to pay. And bankruptcy is the last alternative that allows someone to wipe out their debt.
And there’s generally two types of bankruptcy. There’s Chapter 7, which I like to put in simple terms, can be considered as a liquidation of all of these person’s assets and everything gets paid off with whatever they have. And then Chapter 13, which is a little bit more common, is when someone is on a forced payment plan. Just to put it in simple terms, where a judge may decide how much disposable income someone has and they’ll put every cent of that disposable income and leave that person with a very strict budget to pay off their debts.
And that debt could be unsecured credit cards; it could be medical bills; it could be a mortgage, depending on which type of bankruptcy you are filing for. It could be back-due rent; it could be utility bills; it can be pretty much any bill someone has at the end of the day, depending on which chapter they’re filing for. Chapter 13 would look at anything someone owes and they took out a loan for. But what isn’t included, which I also think is very important, are student loans that come from the federal government, alimony. Child support is also another thing that’s not allowed to be discharged in bankruptcy. So when someone takes a look at their financial landscape, they should really take a look at all of their tax bills, which also may not be discharged as well, and understand what can be and what shouldn’t be, and they should actually confer with an attorney to decide what goes where.
J.R. Whalen: All right, so walk us through the process here. If someone is thinking about filing for bankruptcy, there’s some initial homework here that you mentioned you need to do, but what are the first steps that they should take on if they’re considering it?
Natalia Brown: A list of assets. All of the deeds and titles to properties, if there are any. Assemble the tax returns, at least for the last three years; they do want to see a continuous record. You’re going to need proof of identity, paperwork related to any loans, divorce decrees, the child support orders, statements, brokerage, retirement accounts, anywhere where there may be any type of savings or income or asset. Then you go to an attorney. They’ll advise on the types of bankruptcy depending on the information that was presented to them. It’s also important to still pay your essential bills. Just because you’re filing for bankruptcy, it doesn’t mean that you stop paying rent or some of the essentials that you’re going to need every single day because you don’t want to continue to pile onto those debts.
And it’s a complete lifestyle change. You’re going to have to get into the right mindset to understand that there’s going to be a little bit of an intrusive process. You’re going to have strangers going into your financial background and then deciding for you what’s going to happen next as far as how much is going to be paid, or what might be sold to pay off debts, and that once you file, that is no longer your choice. It becomes a judge decree depending on the information that’s provided.
J.R. Whalen: And a lot of that happens after you file for Chapter 7 or 13?
Natalia Brown: Correct. And there’s also an upfront cost that needs attention as well, because bankruptcy has an upfront cost of anywhere between $1,000 and $3,000, depending on where you are and what type of bankruptcy you’re filing. So it’s really important to also still have some savings so you can actually afford the attorney to file that bankruptcy for you.
J.R. Whalen: Okay. So how long does all this take, from the filing to the point of emerging from bankruptcy?
Natalia Brown: That is really dependent on the individual. If there are no assets and there’s no income per se, it could be a fairly quick process. It’s just a matter of getting scheduled and in front of a judge. If there is a lot of income or a lot of assets and a lot of debt in a myriad of places, it’s really going to take a lot longer to make sure that the attorney can locate and understand what all the debts are. It also takes a little bit longer because a lot of people don’t know where everything is. So there might be a little bit of an investigative process to find out what assets exist, and that can be pretty extensive. Once all of that’s done and it’s really just getting scheduled in front of the judge, they get presented with the information and then they decide. And from that decision, it can take years, depending on how long it takes to sell an asset. It could be very quick if there are no assets. So it really depends on individual situations and what they have and what they’re entering into the bankruptcy.
J.R. Whalen: So there are definitely some benefits to this process for people, but what are the risks of seeking personal bankruptcy protection? How would it affect someone’s finances and their credit profile?
Natalia Brown: There’s definitely a huge risk when it comes to your credit profile. Your credit is essentially saying, “I did not have the ability to pay.” Whether you filed Chapter 7 or 13, your credit report is going to tell any future lender that you did not have the ability to pay. So once bankruptcy is done and you’ve been accepted and you’ve gotten into it, either payment plan or liquidation, your ability to acquire a new loan or any new trade line is going to be very difficult, and generally speaking, that’s about seven years. So it’s a complete lifestyle change for a very long time. The process may not take seven years, but the after effects can last seven years. So if there’s any aspiration to get into a new home or to buy a car, or even for certain jobs where you have to go through a security clearance, you would not be able to get into that job because of your credit score and your previous bankruptcy. So it’s really important to understand that there’s a lasting impact.
J.R. Whalen: If they do go the bankruptcy route, tell us about what things look like afterwards. How do you start over and regain your financial footing?
Natalia Brown: One of the first things that someone can do once they’re done with bankruptcy is open up a secured card. Get a $500 secured card and start building that credit history back again. That’s going to show that even though I’ve filed bankruptcy, I now have the ability to pay, and you start reestablishing your credit. You also want to learn, especially if you’re on a payment plan, you’ve learned to be on that forced budget. If you were successful in bankruptcy, in a Chapter 13, you’ve learned to live within your means, you’ve learned to make payments on time, and now that that debt’s gone, you have the ability to save. That’s really important. Just because you’re done with the bankruptcy, let’s say your payment was $900, you might want to get a little bit more comfortable again because you were on a forced budget, but don’t start spending the $900. Definitely take some large percentage of that and put it towards savings and investments, and reestablish yourself so that you’re financially independent as much as possible.
J.R. Whalen: All right, that’s Natalia Brown from National Debt Relief and the American Fair Credit Council joining us. Natalia, thank you so much for being with us.
Natalia Brown: Thank you so much for having me. I really enjoyed our conversation.
J.R. Whalen: And before we go, a quick note. We’re off on Monday, January 2nd, but on Tuesday the 3rd, we’ll have a bit of a bonus episode in our special debt series for you. We’ll take a look at the other side of the coin, times when you might not want to get rid of all your debt.
Speaker 3: So even with interest rates rising, they’re still relatively low by historical standards in many cases. So if you think about this, and the idea that people are living much longer these days and healthier too, holding on to the right kind of debt can be a solid financial move.
J.R. Whalen: We’ll lay out what you need to know about good and bad debt. That’s next Tuesday on Your Money Briefing. I’m J.R. Whalen for The Wall Street Journal.
