Bankruptcy - is it a good option
Today more people than ever are turning to personal "bankruptcy"
as a way of solving their financial problems. Estimates indicate
that 2005 will see nearly 1 in 60 Americans filing for
bankruptcy. People owing as little as $6,000 are unknowingly
filing, not knowing of alternative methods of eliminating their
debt.
The reason people take this hasty action with such a low debt
amount is the harassment and overwhelming pressure from
impatient collectors trying to recover their money. In the case
of Consumer Credit Counseling agencies, once they find that they
are unable or unwilling to help, they will suggest "bankruptcy"
as the answer - unconcerned of the effect it will have on your
future.
In bankruptcy, a court order forces all commercial creditors to
cease and desist from attempting to collect the debts you owe
them. Depending on the bankruptcy declared (Chapter 7 or 13), it
stops wage garnishment, reverses judgments, and generally wipes
out debt.
For some people, bankruptcy is the only sensible option. If you
have $60,000 in debts, and you'll never earn more than $1,200
per month, then you're broke! The sooner you eliminate the debt,
the sooner you'll have a fresh start. With more than 1.4 million
bankruptcy filings in 2000, Congress is passing legislation that
will make it tougher to declare bankruptcy.
In "bankruptcy", certain personal property is treated as exempt.
The banks and creditors cannot touch that property in attempting
to recover the money owed to them. Your home, car and other
personal effects like clothing, and other assets are considered
exempt, but this varies from state to state. Any property that
is not exempt is liquidated and distributed to the creditors
under the supervision of the court. Since most people entering
bankruptcy have only exempt property anyway, there's usually
nothing left to distribute, so the creditors typically get
nothing.
Seems like a good deal? Many people mistakenly see bankruptcy as
a good, low cost way to rid themselves of debt. There are other
costs associated with bankruptcy that make it a very bad
solution for most people. The cost of filing bankruptcy itself
is minimal. Depending on what state you live in, you can expect
to pay anywhere from $400 on up to $1,600 for the whole process.
That's just the beginning. The bankruptcy will stay on your
credit report for 10 years - and on your court records for 20
years. The seemingly "low cost" method will cost you dearly as
it will follow you for the rest of your life. If you ever apply
for a loan, job, apartment or insurance, one of the first
questions normally asked is "Have you ever filed for
bankruptcy?" And, for the rest of your life, you'll have to
answer "Yes."
You might be able to eliminate your debt, but the effects
emotionally and the effect on your personal life will last for
many years to come. Consider applying for a terrific job after
you have filed bankruptcy. These days, employers will run a
credit report to determine how you faired financially. This will
effect whether the employer will give you that dream job or not.
Even if you do get the job and your employer later runs a credit
report on you, you will still have to explain the bankruptcy.
While employers can't fire you because of a bad credit report,
they can certainly limit your future promotions.
Future purchases are affected as well; after several years, you
may opt to purchase a home. If you're in sufficient shape at
that point to qualify for a mortgage, you'll pay a higher
interest rate than the average consumer who has never filed for
bankruptcy. Assume you want to purchase a $100,000 house a few
years after filing bankruptcy. You make a $10,000 down payment.
This will result in applying for an $80,000 mortgage. While your
"good credit" neighbor would obtain an interest rate of 4.5%,
you would get a rate of 7%. While it seems that the extra 2.5%
difference is not bad for having filed bankruptcy in the past,
it's what you will pay monthly where you will feel the pinch.
That extra 2.5% on a mortgage will increase your monthly payment
by $200 per month with the total of your payments reaching more
than $70,000 over the 30-year life of the mortgage.
Besides being a devastating blow to your credit, a bankruptcy
can also be a very stressful and embarrassing decision to
continually have to explain to every potential lender. If you
have no choice, then you should proceed, understanding the
consequences. However, the majority of people who take this
method of debt elimination don't know what they're getting
themselves into or the consequences thereafter. They are
desperate, and they get talked into filing bankruptcy by the
collectors or attorney without understanding the impact on their
financial future.
Keep in mind that personal bankruptcies are usually unnecessary
as there are better options available. Many people are forced,
against their wishes, to file bankruptcy to protect themselves
from aggressive creditor tactics or attorney. Ultimately,
bankruptcy still means failure to employers and creditors.
Complete Bankruptcy Information and services
provides access to free filing bankruptcy information and
resources.