The Basics of Bankruptcy

By Dave Ramsey

I put bankruptcy in the same category as divorce—no one thinks this is a great idea. Even though they do everything possible to avoid it, sometimes good people have to go through it. Even quality bankruptcy attorneys will tell you it is a last resort. The fear, the shame, the guilt—it turns your world upside down.

Sadly most people who file bankruptcy have simply lost hope and can't see another way out. They've given up. About 90% of the people who come to our office or call my radio show have another way out but are too wrapped up in the emotions of the situation to see other options. But when you're standing on the outside and not in the middle of the financial mess, it's easy to see other alternatives. By selling the car, taking an extra job, living on a budget, having a garage sale, quit paying this or that most people can make it out of the hole. There may be some dings on their credit but its better than filing bankruptcy.

There are two main types of consumer bankruptcy:

• Chapter 13 means the court approves a plan for you to repay your debts over time.
• Chapter 7 means the court sells your assets in order to pay back as much as possible, with some exemptions that vary state to state, to allow you to keep some personal items and maybe some home equity.

But keep in mind bankruptcy doesn't completely wipe the slate clean because in most cases you can't eliminate child support, alimony, taxes, and student loans.

What To Do

If you are at the bottom, the place to start is with the basic necessities. Fourth-grade civics class taught us necessities are: food, shelter, clothing and transportation. Today we also include utilities. First make sure food and utilities are taken care of. Then make sure your rent or mortgage is current, and lastly the car payment is up-to-date. Don't pay anyone else until these are done.

Sell everything in sight to make it happen. Spread any leftover money across your other bills to keep the creditors as happy as possible. This plan allows you to live to fight another day. But if you are current with MasterCard and about to be evicted, you will quickly lose hope. If you've already filed bankruptcy, you can get past it. Everyone I've ever met who has been wildly successful has failed at one point or another. They built success by learning from their mistakes instead of carrying them around and wallowing in them. Make sure you learn from the experience because you don't want to do stupid twice.

There is life after bankruptcy, I know, but if you can find any way to avoid it you should.