Beating Broke

Personal Finance from the Broke Perspective

Debunking Myths about Filing for Personal Bankruptcy

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If you’re thinking about filing for personal bankruptcy (either chapter 7 or 11), then the most dangerous adversary you face at this time isn’t an army of aggressive creditors: it’s a horde of devastating myths!

Indeed, there is arguably more misinformation floating around online and offline about bankruptcy than there is reliable information. That’s the bad news. The good news is that you can arm yourself with facts so that you can make informed decisions that are best for your current and long-term financial interests.

To that end, let us debunk the most enduring — and potentially catastrophic — myths about filing bankruptcy:

Myth: Filing for bankruptcy is an admission of financial irresponsibility or incompetence.

Fact: Across the U.S., more than 1.5 million individuals file for bankruptcy protection each year. The vast majority of these people aren’t thrill-seeking spendthrifts. They’re regular, ordinary people who fell into a debt hole that became a debt trap. For some, it happened slowly over time. For others, they were financially sideswiped by unexpected medical bills, home repairs, job loss, divorce, and the list goes on.

The message here is simple: if you decide to file for bankruptcy, then be assured that it’s nothing to be embarrassed about or ashamed of. Unsustainable debt happens. Filing for bankruptcy is a legal process designed to help people get out of debt and start fresh. It’s a protection, not a punishment.

Myth: Filing for bankruptcy will destroy your ability to get a loan in the future.

Fact: Yes, it’s true that filing for bankruptcy will damage your credit score (the actual number depends on where your credit score is right now — the higher your current score, the larger the drop).

However, it’s not true that filing for bankruptcy will permanently destroy your ability to get a loan in the future. Within months of filing for bankruptcy you can start rebuilding your credit score by applying for secured credit cards, and paying all of your other bills on time and in full. Within a year you’ll be eligible for a car loan or personal loan (you could actually get a car/personal loan sooner, but the rates will be sky high), and in a couple of years you’ll qualify for a competitive-rate mortgage.

Ironically, many people who file for bankruptcy end up surpassing their old credit score ceiling, because in their new post-bankruptcy life they are in control of their saving and spending, and are far more aware of the dangers of only paying the minimum amount on credit cards, buying “too much car” or “too much house,” and so on. They’re like people who, after getting a serious health scare, end up taking their health and wellness to unprecedented levels. They go from couch potato to marathon runner.

Myth: To save money, you should represent yourself in bankruptcy court.

Fact: If you have a legal background — and this doesn’t mean a few law classes in college or a neighbor who was once a paralegal — then you might be fine representing yourself in bankruptcy court.

However, if you’re like most people — i.e. you couldn’t write a book on how to correctly and safely file for bankruptcy — then do yourself an immense favor and consult a bankruptcy lawyer. You’ll not only avoid potentially costly mistakes, but you’ll save a great deal of time and stress. Why stress? Because once you file for bankruptcy, you want to ensure that everyone else around the table — from the court-appointed trustee, to all of the creditors who want a piece of the settlement pie, and even to the judge who is a human being and can make errors — behave in a legally compliant and appropriate way. A bankruptcy attorney ensures this happens.

The Bottom Line

Arming yourself with bankruptcy facts — and debunking myths — will help you make an informed decision on whether moving ahead in this direction is in your best financial interest.

If so, will it be a walk in the park? No. But it won’t be a trek through a minefield, either. With the right information, guidance and support, you’ll make it through this phase and into your new, better financial life ahead.

What Happens if you Default on a Student Loan

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This post in collaboration with Paul Brian.

Believe it or not, student loans are one of the most secured loans a lender can issue. In the vast majority of cases, student loans cannot be discharged under bankruptcy protection, nor can they be negotiated away under a debt settlement program. If you have one, you will satisfy the terms, there’s simply no escaping it.

Here’s what happens if you default on a student loan.

First, What Constitutes Default?

The exact conditions of a default vary a bit from lender to lender, but in the case of Federally backed student loans, nine months of missed payments will get your student loan classified as being in default. It could also be found to be in default if you violate some other aspect of the loan agreement, or got the loan under fraudulent circumstances. Although, defaulting can be avoided or delayed when you refinance student loans to have reduced interest rates.

If any of the above happens, you’ll experience the following.

1. Forfeiture of All Loan Benefits

The loan will become due and payable immediately—including interest payments and late fees (if any). You will not qualify for loan forgiveness, deferment or forbearance. If you decide to go back to school and have a loan in default, you can forget about all forms of financial aid.

2. Assignment to a Collection Agency

Get ready for incessant phone calls, text messages and emails. These people have an uncanny knack for knowing the most inopportune moment to contact you and hound you mercilessly (while staying well within legal bounds) until you agree to a plan to repay the loan and stick to it. You can also be taken to court in extreme situations.

3. A Negative Entry on Your Credit Report

The default will be reported to the credit agencies, which will pull down your credit score significantly. A huge part of your credit score (35 percent) is loan payment history. A default on your record will pretty much wipe that category out. This will make it difficult for you to get a mortgage, rent an apartment, buy a car, get insurance and in some cases, even get a job.

4. Wage Garnishment

If your lender takes you to court and gets a judgment against you, the court will order your wages garnished until the amount of the loan (as well as fees and interest) is paid. This will mean an embarrassing situation at work and a large portion of your income will go straight to paying off the loan—before you ever see it.

Avoiding Default

If you’re concerned you might be about miss payments, contact your lender at once and try to work out some sort of an arrangement to help you stay on track. If you have a Federal loan, you might qualify for forbearance or a deferment of up to six months to help you get your finances back in order. If you’re still in good standing, you might be able to renegotiate the loan to lower your payments. The key is catching things as early as possible so you have the best options.

Getting Out of Default

The good news is default status isn’t the end of the world. All they really want is the money. Find a way to repay them in full and the default will be dismissed. Yes, it will take a while for your credit score to recover, but getting it marked “paid in full” will help.

Of course, if your student loan is in trouble, odds are many of your other debts are too. This is when you might consider hiring a debt relief firm.While these companies don’t deal with federal student loans, they could help settle your credit card, personal loan, and medical debt, which could make it easier to repay the student loan. As you explore this option, take some time to research information such as these Freedom Debt Relief reviews to make sure you choose a good company.

In conclusion, student loans might be some of the biggest loans you take on in your life. But unlike other loans, once they are taken out, payment is inescapable. Do everything you can to avoid defaulting on your student loans.

4 Wise Investments to Make in Your 20s

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One unfortunate reality of the current education system is that many young people leave college without really having an understanding of how to handle their finances. Since many millennials don’t reach financial autonomy until after they graduate from university, plenty of professionals in their 20s don’t know how to make wise money choices now. On the plus side, you don’t have to be a stock-market maven to ensure your financial stability. Rather, you can start by checking out these four savvy ways to invest your money while you’re still young:

Start Saving Now

The sooner you can begin to set aside money in a 401k or similar retirement fund, the better. Though young people may not realize it, it’s imperative for them to build out a healthy retirement plan that can withstand market fluctuations and other trying circumstances. (Consider for a moment that most prognosticators foresee substantial cutbacks to programs like social security as an inevitability rather than a possibility, and you’ll quickly recognize the need to start saving today.) Instead of scrambling to put together a savings strategy in your 40s, save yourself a massive headache and start early.

Education

It may seem crazy for individuals who have just graduated college to invest even more money in education –– but sometimes that’s the best way to move forward. If further certification will allow you to make substantial advancements in your career, then you should seize the opportunity to attain it. Getting that extra bit of education could help you make the most of your money in the long run.

Insurance

Reckless though it may be, many young people don’t purchase the sort of insurance they need to safeguard themselves from accidents and worst-case scenarios. In fact, you’d be hard-pressed to find someone who could answer simple insurance questions, like how does a deductible work, or what is physician disability insurance? True, no one likes to think about debilitating accidents or unfortunate events, but they happen all the same. So make sure you and your loved ones are protected with proper insurance coverage.

Diverse Stock Choices

We wish we could tell 20-somethings which stocks are going to take off in the next ten years and which ones are going to flounder. Of course, no one can consistently predict how the stock market will vary and change over time. Instead of trying to find the “perfect stock” in which to invest a huge portion of your capital, it’s almost always a better idea to spread your money across a series of diverse investment options. That way, you’ll always be covered even if a few of your choices don’t pay off. Furthermore, it’s not a bad idea to seek out professional assistance when investing your money. If you’ve got the desire to play the stock market for many years into the future, you should make sure to surround yourself with individuals who can help you do so more effectively.