Dollar Scholar Asks: Does Filing For Bankruptcy Mean I’m Doomed?


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You know the villain in The princess to be married, Vizzini, who always tells his minions how “inconceivable” things are? The possibility that someone followed them after they kidnapped Princess Buttercup? Inconceivable. The fact that the Dread Pirate Roberts survived even though Vizzini cut his climbing rope? Inconceivable!

Remember how eventually Inigo Montoya aka Mandy Patinkin got fed up and delivered one of the movie’s most famous lines?

“You keep using that word,” he said to Wallace Shawn-as-Vizzini. “I don’t think it means what you think it means.”

Well, I’ve come to find that extremely relevant. There are a lot of words that I say without really understanding what they mean. “Blockchain” is one of them, as is “cheugy.” And then there’s “bankruptcy” – which I use casually all the time, as in “this next Louis Tomlinson tour is going to bankrupt me”.

I’m vaguely aware that Missouri bankruptcy can be a way for people to bounce back when they’re in dire financial straits, but I’m unclear on the mechanics.

How is the declaration of bankruptcy?

I asked Howard Dvorkin, President and CEO of, to help me understand. He told me that bankruptcy is a way for people to get rid of their debt and “start over when all else fails.” This is how the Supreme Court described it in a 1934 opinion, asserting that bankruptcy gives the “honest but unfortunate debtor” the opportunity to prosper “unhindered by the pressure and discouragement of pre-existing debt”.

(Note: I’m focusing on personal bankruptcy here, not the Toys ‘R’ Us genre.)

Declaring bankruptcy is not very common. In 2020, only about 523,000 people do therefore – the lowest number of filings since 1986, and down from 752,000 the previous year. (Another note: It’s not because everyone suddenly became financially stable. It’s probably because the courts were closed due to quarantine.)

There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. According to Dvorkin, Chapter 7 “is what most people think of when they imagine bankruptcy,” where the court sells some of my assets for repay my debts. Chapter 13, on the other hand, is more of a reorganization where I pay off some of what I owe through a court-ordered plan.

Chapter 7 is largely aimed at low-income people. It’s fast, taking around 120 days compared to Chapter 13, which can take up to five years.

According to Shereen Middleton, a bankruptcy attorney in Maryland. Bankruptcy can be a strategic move to eliminate that debt, “which would then leave you with a favorable debt-to-income ratio,” she adds.

“It’s something that can literally change your life,” says Middleton.

Besides being emotional, declaring bankruptcy is not cheap. Dvorkin says the process involves pre-bankruptcy credit counseling. He also recommends hiring a lawyer, although it is not mandatory.

“You need someone experienced in your area to do a lot of the work for you,” he says. “A small mistake on your part could leave you with a debt that a lawyer could have gotten off with. It’s not a cost you can reduce.

Middleton says his company considers a person’s financial situation; she also takes pro bono cases. Typically, however, attorney fees range between $1,000 and $3,000. Clients must also pay court filing fees.

There are also other disadvantages to declaring bankruptcy.

Dvorkin says it stays on my credit report for 10 years from the date of filing for chapter 7 and seven years for chapter 13. This means lenders will see that I filed for bankruptcy each time I apply for a new credit card, mortgage or apartment. If I am looking for a loan from the Federal Housing Administration or VA, I will have to wait one to two years from when my bankruptcy is discharged.

Middleton also explains that there are limits to the number of personal effects I can protect from court. This varies by district, but the dollar amount often peaks at around $12,000. Retirement savings like 401(k) assets are usually protected as well, so it’s a good idea to consult an expert before touching these accounts. She says if I have a lot of unprotected assets — like cryptocurrency, stocks, or real estate with equity — I might consider other options for debt relief.

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The bottom line

Bankruptcy is more complicated than I thought. It can be a way for someone who is deeply in debt and can’t make ends meet to get back on track. That said, with a clean slate comes some pretty serious downsides, including the cost of hiring a bankruptcy attorney and the long-term impact on my credit report.

Because of this, Dvorkin says people who file for bankruptcy should really put their fresh start to good use.

“If you were going through all the financial and emotional stress of filing for bankruptcy just to rack up thousands of dollars in debt again, it would have been a waste,” he says, adding that most people don’t. “No one should jump straight into bankruptcy as an option for debt relief – but neither should they rule it out of hand.”

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