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Michigan Credit Union League Home » CU Community » SAS Credit Unions » Marketing » Newsletter Help » Financial Health  

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Bankruptcy: What's It Going To Cost You
Lori Bahnmueller
Michigan Credit Union League - Your Money Matters

This year, a record 1.3 million people are expected to file for personal bankruptcy, either to structure payments to repay some of their debt or else just wiping the slate clean.

According to USA Today, the No. 1 reason consumers file for bankruptcy is credit card debt, claiming a total of 63 percent of all filers.

Imagine having a tough time making credit card payments. Like a miracle, an out-of-state bank sends a preapproved application for a new card with a $5,000 credit limit. Your problem is solved - temporarily.

Later you find that you've once again maxed-out another credit card. And, mail offers continue to roll in. You find yourself signing up, soon so deep in debt that you're sinking into financial quicksand.

Then you see the ad on television: A lawyer offers to solve your credit problems in a flash. All you have to do is declare personal bankruptcy and your troubles are over.

So, take your pick: Chapter 7, under which you liquidate all nonexempt assets. Or, Chapter 13, which allows you to reorganize and keep some property, such as a mortgaged home or your card. In either case, you wipe the financial slate clean and get to start all over again.

And, its so easy - or is it? There is a big price, for you and for the vast majority of people who pay their bills and take responsibility for their financial habits.

Consider the following penalties of bankruptcy:
1. It costs money to go bankrupt. Attorney and filing fees can total hundreds of dollars.

2. Not all debts are dischargeable. For example, income taxes and most student loans are not dischargeable. Others include debts of more than $500 for luxury goods and services, and cash advances of more than $1,000 obtained shortly before filing.

3. Public knowledge of your personal finances. Bankruptcy proceedings, which reveal your personal finances, are public.

4. Credit bureaus can keep a bankruptcy on record for 10 years. This often makes further credit hard to get and more expensive. Plus, if a credit file is used for loan or life insurance applications of $50,000 or more, or for a job application involving an annual salary of $20,000 or more, time limits don't apply.

5. Bankruptcy can be very demoralizing. Most people feel better when they pay their bills.

Some people find themselves in situations not of their making that leave them little alternative but bankruptcy - and those are the people bankruptcy is meant to help. Bankruptcy law is designed to relieve people who have crushing debt beyond their control, such as from illness or a job layoff. Then, the bankruptcy court can enable a debtor to build a new life by nullifying some or all debt.

Although job loss or high medical expenses combined account for more than 75 percent of consumer bankruptcy, plain credit misuse is also a major factor. For instance, if your debt load is high, and you do encounter a job loss or a medical expense, your budget doesn't stand a chance.

If your debt load is at the max, start to reduce it now. Don't let your financial situation become another statistic in the growing rate of personal bankruptcy filings. If you're experiencing financial stress, talk to your local credit union - many credit unions offer financial counseling. Or, contact the Consumer Credit Counseling Centers at 1-800-547-5005. Both non-profit organizations can help you determine just where you stand financially.

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