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Why to Avoid Bankruptcy

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Bankruptcy is a legal process initiated when an individual declares the inability to pay his or her debts. This may be due to unmanageable consumer debt, medical costs, unemployment, or any combination of factors that can affect a person’s financial security. Bankruptcy may seem like the only option for release from mounting bills, but it comes with high costs.

Types of Bankruptcy

There are three ways to file for bankruptcy:

·         Chapter 7 bankruptcy clears most of your debt. Debt which is not discharged includes certain obligations like alimony, child support, and other specific instances. Many assets you own must also be liquidated, though some of these may be exempt. Chapter 7 stays on your credit report for 10 years.

·         Chapter 13 bankruptcy lets you keep your assets, but you must set up a repayment plan for debts. Chapter 13 also stays on your credit report for seven to 10 years.

·         Chapter 11 bankruptcy is filed to reorganize a business. This form of bankruptcy is often used by a corporation needing time for debt restructuring.

Reasons to Avoid Bankruptcy

Before you file for bankruptcy, consider some compelling reasons why you might want to avoid it at all costs:

·         Chapter 7 and Chapter 13 bankruptcies stay on your credit report for many years. This may negatively impact your credit score and affect your ability to get credit during this time.

·         You may have an extremely difficult time qualifying for a mortgage, an auto loan, or other types of secured loans. If you do qualify, you will pay for the privilege. Down payment requirements may be higher than usual, and the interest rate you pay for these loans may be much higher than it is for customers with better credit.

·         You may not be able to obtain unsecured loans, like credit cards. You may be required to open a secured credit card, which mandates a security deposit and may come with high fees.

·         Some of your retirement assets may be at risk if you file bankruptcy. IRA savings over a certain amount may need to be turned over in bankruptcy proceedings.

Changes in the Law Make Bankruptcy More Difficult to File

Another reason to avoid bankruptcy pertains to the Bankruptcy Reform Act of 2005. This law makes it impossible for certain people to file Chapter 7 bankruptcy. It narrows the type of debt that people can write off in bankruptcy and it requires that you attend credit counseling at your own expense prior to filing. Under this law, debt repayment plans may be difficult to develop, and you may have less protection against collection agencies.

Bankruptcy Affects Other Areas of Your Life

Filing bankruptcy sounds relatively simple: file, erase all debts, and move on. But even after information on your bankruptcy disappears from your credit report, you may be asked by loan officers and potential employers to reveal whether you have previously declared bankruptcy. The stress of going through bankruptcy may affect your personal life and relationships. Some financial advisors rank the experience of declaring bankruptcy alongside other stressful and life-altering events, including death, job loss, or divorce.

Consider Alternatives to Bankruptcy

Before you resort to filing for bankruptcy, consider alternate measures that may help to relieve your financial woes:

Attempt to negotiate with your creditors to develop a payment plan that will work for both parties. A creditor is likely to be more interested in recovering the debt under revised terms rather than suffering a total loss in a bankruptcy write off. You can carry out these negotiations on your own, with an attorney, or with a credit counselor. You may be able to set up a payroll deduction, if you have a regular paycheck, for debt repayment.
Consider a debt consolidation loan, which can result in a single, more manageable monthly payment. A credit counselor can work with you to reestablish good credit and help improve your future financial situation.
Examine your financial habits. If your close call with bankruptcy is due in large part to credit card or other personal debt, you will want to reevaluate how you choose to spend your money and make changes that will help you avoid any new debt.

Resources for Assistance with Credit Counseling and Debt Management

·         For credit counseling, contact the Consumer Credit Counseling Service at www.nfcc.org. Consumer Credit offices are located throughout the U.S. The organization also provides help for those facing home foreclosure.

·         Myvesta (www.myvesta.org) helps with credit counseling and obtaining credit reports, and provides information comparing secured credit cards and other credit cards for people needing to rebuild their financial situation.

·         Debtsteps.com offers solutions to managing debt, and compares debt consolidation programs. It also offers budget worksheets.

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