November 9, 2018

Bankruptcy: What the Media Doesn’t Always Get Right

Bankruptcy and the mediaUnfortunately, “bankruptcy” has a stigma attached to it that even the world’s biggest businesses and brightest stars can’t seem to shake. It is, in popular culture, a bad word — a signifier of financial failure. Those who have “gone bankrupt” have “lost everything,” or at least that is what one learns when listening to the latest reports on the subject.

On the contrary, though, bankruptcy is not the end of the world for the businesses or individuals who claim it. In fact, there are several different types of bankruptcy, and many of them allow filers to make the most of an otherwise disastrous situation, only to come out quite successfully on the other side.

That is, after all, why the United States allows bankruptcy to exist in the first place. It is a legal protection that saves those who are in over their heads from going under and allows them to achieve a “fresh start.”

In “Wheel of Fortune” or the game of Monopoly, going bankrupt simply means losing all of your money. In real life, filing for bankruptcy means asking the courts to protect you from the oppressive mountains of debt that might be standing in your way. It allows many people to rid themselves of this debt that has burdened them literally, figuratively and psychologically for many years. For many Chapter 7 filers this debt can be eliminated in a period of 3 to 5 months.

Even for other types of bankruptcy, like Chapter 13 (which requires a payment plan for between 3 to 5 years), the bulk of the debt for most people can be eliminated upon completion of the plan. Simply put, most plans repay pennies on the dollar for unsecured debt and upon successful completion the remainder of this debt is eliminated. Chapter 13 also has the added benefit of giving those people who have fallen behind on their home mortgage payments a chance to get caught up over a period of time. It is a very commonly used for people to save their home, when other options such as negotiation or modification have failed.

In addition, far from losing all their money, the average person filing for bankruptcy does not lose their possessions. The modern bankruptcy laws allow people to keep things like homes, cars, jewelry, bank accounts, retirement accounts, etc. in varying amounts. These amounts are generous enough so that the average person gives up very little or in many cases none of their current possessions.

Further, contrary to what most people think, bankruptcy does not destroy their credit for all time. It will be on their credit report for 10 years. However, it is but one mark on that report, which can be rehabilitated much sooner than 10 years. Many past clients have reported that with careful planning they have been able to rehabilitate their credit in as little as 2 years.

Many companies and individuals have enjoyed hugely successful turnarounds after a bankruptcy filing — comebacks that would likely have been impossible without federal bankruptcy protections in place. Indeed, as Reuters reports, popular retailer American Apparel, which filed for bankruptcy earlier this year, is on track to score the most profitable year in its history by next decade. Many individuals have seen similar salvation in their own personal finances after a bankruptcy filing.

Sadly, the American news media has very little time to stop and dive into the details of any given story. Likewise, comedy films exist to make us laugh, not to offer an erudite lecture on the finer points of financial strategy. So just know that the next time you hear a headline or a joke about the failings of those who’ve gone bankrupt, you might not be hearing the whole story. There’s a lot more to bankruptcy than a stereotype.