Financial Fresh Start
You’ve probably heard it before. “Bankruptcy gives you a financial fresh start.” It’s something stated on this blog all the time. But was does “fresh start” actually mean when it comes to your finances and filing for bankruptcy?
In most cases, the fresh start promised when you file for bankruptcy refers to the discharge of your debts. People who successfully file for Chapter 7 bankruptcy receive a release from their legal obligation to repay their debts. Financially, this means you can start over managing your finances and rebuilding your credit.
Chapter 13 bankruptcy doesn’t provide exactly the same kind of fresh start, but it still exists. The payment plan you set up in Chapter 13 means you’ll be moving in the right direction and get to “reset” or “restart” your financial situation.
Keep in mind, bankruptcy is a process. You don’t automatically end up debt-free as soon as you file. There are other automatic benefits, but in general, you’ll need to go through the process of bankruptcy before you can enjoy everything it has to offer. Once complete, your debt liability is lifted and you get a fresh start.
Supreme Court Recognizes Bankruptcy’s Fresh Start
This concept of a fresh start isn’t just something used as a marketing gimmick to get people to file. The US Supreme Court in 1934 even described how filing for bankruptcy affects an individual by saying:
“[Bankruptcy] gives… a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
Bankruptcy lifts your burden of debt. Even if all of your debts are not discharged after Chapter 7, you’ll still be in a better financial situation than you were before filing.
Additionally, you’ll learn new credit and money management skills and gain knowledge throughout the process that you never would have had if you’d not filed for bankruptcy.
What a Financial Fresh Start Isn’t
As great as it is, bankruptcy’s fresh start might not eliminate all of your financial problems.
The most obvious is that bankruptcy doesn’t discharge all types of debt. The most common debts “leftover” after bankruptcy involve taxes, student loans, and child support and other court-ordered debts.
For more information about debts that aren’t discharged in bankruptcy, check out this article from Investopedia.
Furthermore, the financial fresh start you receive in bankruptcy doesn’t mean your debts disappear. The debt continues to exist, but the court eliminates your legal liability to pay it. Creditors cannot try to collect on the debt, but the debt still exists. It might appear on your credit report or result in a property lien, depending on the type of debt it is.
Some people even choose to pay their discharged debts on their terms after bankruptcy. It’s rare, but they filed to end the aggressive collection efforts and increasing penalties, and without those, they can now slowly repay their debts.
Bankruptcy Isn’t Perfect, But It’s a Powerful Solution
The most important thing to remember when it comes to bankruptcy is that it will help you, even if it doesn’t solve every financial problem you face.