THINK TWICE BEFORE FILING BANKRUPTCY
Lori Z. Bahnmueller
Michigan Credit Union League - YOUR MONEY MATTERS
As debt has continued to increase more than paychecks in the last decade, personal bankruptcies have soared. This year alone, over one million bankruptcies will be filed in the United States. But is it really such a good idea for someone over their head in debt?
As a consumer, you can be hurt. Consider the consequences of filing 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, recent income taxes and student loans generally are not and child support never is. Your home mortgage and car loans are usually secured and the creditor is entitled to take the property involved if they don't get paid.
3. In bankruptcy proceedings, your personal finances become public knowledge and the legal activities can be time-consuming.
4. Credit bureaus can keep a bankruptcy on record for up to 10 years, often making further credit hard to get and more expensive. The bankruptcy actually stays on your record longer than 10 years because it can be reported if a credit file is used for a loan or life insurance applications of $50,000 or more. The same applies for a job application involving an annual salary of $20,000 or more. Not many employers are eager to hire someone who has declared bankruptcy.
5. Finally, bankruptcy can be very demoralizing. Most people feel better when they pay their bills.
Unfortunately, consumers also have no idea what bankruptcy costs them in the form of higher interest rates, tougher lending guidelines, and higher prices in the stores. Nearly half of the fees that consumers pay for credit cards are used to cover credit card bankruptcy losses.
Bankruptcy law is designed to relieve persons of crushing debt beyond their control, such as from illness or a job layoff. Then, bankruptcy court can enable an unlucky debtor to build a new life by nullifying some or all debt.
U.S. Law takes two approaches to bankruptcy. Chapter 7 is provides a straight liquidation, in which most unsecured debts are discharged 100%. Chapter 13 provides for repayment of some or all debt under court supervision. As long as the debtor makes agreed-upon payments to a trustee, creditors are held at bay.
Although job loss or high medical expenses from illness or injury account for more than 60% of consumer bankruptcy, plain credit misuse is also a major factor. If your debt load is high and anything happens to your budget -- such as a job loss or unplanned medical expense -- it all comes tumbling down.
The law requires attorneys to certify they've counseled clients about bankruptcy effects and alternatives. But, remember, lawyers don't get paid for discouraging bankruptcy.
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.