WHY DO PEOPLE FILE FOR BANKRUPTCY?
Lori Z. Bahnmueller
Michigan Credit Union League - Your Money Matters
The economy may be booming, but many consumers are going bust. More than one million people filed for bankruptcy in 1996 and the pace at which bankruptcies are being filed in 1997 indicates that the U.S. will exceed last year's numbers. But what it is that causes someone to resort to this drastic measure? A recent report in USA Today sited the top seven reasons why individuals file; here's what they found.
67% credit card debt
50% job loss or pay cut
37 % bad financial management
28 % medical bills
15 % business troubles
13 % divorce
12 % lawsuit or legal bills
One of the biggest problems with the growing number of bankruptcies is that consumers are not fully aware of the consequences associated with this form of relief.
Bankruptcy laws were designed to relieve individuals of crushing debt beyond their control--such as from illness or job layoff--giving the unlucky debtor a "fresh start" by discharging some or all of the unsecured debts.
When someone files for bankruptcy it's usually under one of two options. The most common and well known option is Chapter 7, also known as "straight liquidation," in which most unsecured debts are discharged, usually with no payments to creditors. The second option is a Chapter 13 bankruptcy, which provides partial or full repayment of unsecured debt to creditors over a specified repayment period. With either Chapter 7 or Chapter 13 the individual filing must pay off secured loans--up to the full amount of the loan or the market value of the collateral-- such as a house or car, or lose the collateral (i.e. the house or car).
The thing that many consumers often fail to recognize (or admit to) are the penalties of bankruptcy.
1. First of all it costs money to go bankrupt. Attorney and filing fees can add up to hundreds of dollars.
2. Bankruptcy proceedings, which reveal your personal finances, are public.
3. Non-exempt assets, for example, vacation homes and some jewelry, can be seized and sold.
4. Not all debts are dischargeable. Some taxes and most student loans are not and secured loans rarely will be unless you are willing to give up the collateral. Also, debts of more than $500 for luxury goods and services and cash advances of more than $1,500 obtained soon before filing are most often not dischargeable.
5. If you discharge a loan to a cooperative, such as a credit union, it reduces other members' earnings and benefits.
6. A person cannot apply for straight bankruptcy again for six years after debts are discharged.
7. Credit bureaus can keep a bankruptcy on record for 7 years, often making further reasonable 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 a job application involving an annual salary of $20,000 or more, time limits don't apply.
Finally, bankruptcy can be very demoralizing. Most people feel better when they pay their bills. But, what are the alternatives to bankruptcy?
If you are contemplating filing for bankruptcy, make sure you have explored all of your alternatives. Don't be deceived by advertisements that claim that bankruptcy is a simple solution. Even those advertisements that promise credit to "anyone" -- regardless if they have bad credit aren't telling you the whole truth. You may be able to receive a credit card afterwards, but it's more than likely it will be secured by your own personal funds and if your aren't securing the credit you'll pay an unreasonably high price for it.
If you're experiencing financial stress--one telltale sign is paying only the minimum on credit card bills--talk to your local credit union or contact the Consumer Credit Counseling Centers (800) 547-5005. Both non-profit organizations can help you determine just where you stand financially. You may be surprised to learn that with a simple payment plan, you can catch up on your bills and pay them off in a reasonable time frame. Ultimately, you will learn the skills it takes to handle your personal finances while demonstrating responsibility to your creditors. Although bankruptcy may be tempting, offering a quick fix, when it's all said and done the one thing you haven't gained is the ability to keep yourself out of the same situation in the future.