Understanding Personal Bankruptcy in Difficult Times
Stressful economic periods lead to stressful family finances, which in turn can lead to bankruptcy filings.
Bankruptcy is not a panacea to lift up all your financial troubles and put a smile on your face, as late-night television commercials would have you believe. But in case it turns out to be the only answer, you should have a full understanding of available choices and potential repercussions.
Personal bankruptcies in the U.S. declined 8 percent in the first half of this year compared to the year-earlier period, according to the
"The decline in personal bankruptcies isn't an indication that the economy is vastly improving, but rather an indication that people can't afford to file," said
Chapter 7 is the most prevalent personal bankruptcy, providing liquidation of a debtor's property and distribution by the bankruptcy trustee of proceeds to creditors. There is no repayment plan. Chapter 13 bankruptcy, also known as the "wage earner's plan," allows people with regular income to develop a plan to repay all or part of their debts.
"If you don't have a source of income you will not qualify to file Chapter 13," explained Erickson. "If you are unemployed but can make mortgage and car payments, you can file Chapter 7."
While you can keep your house in Chapter 7, unsecured debt such as credit card debt will be discharged, he explained. However, debt acquired within 90 days of filing can't be discharged -- an assurance that you won't go on a shopping spree, which was common under prior bankruptcy laws.
"Bankruptcy often indicates what is happening in your personal life more than what's going on in the overall economy," said
The bankruptcy process is typically completed in a month or two, but results linger. A Chapter 7 bankruptcy remains on your credit report for 10 years from the date of filing, while Chapter 13 remains for seven years.
Since many loan applications ask whether you have ever filed for bankruptcy even after those seven or 10 years are up, bankruptcy follows you around. Have a clear, concise explanation for why you filed and how you took steps to recover.
Declaring bankruptcy doesn't kill chances of ever getting a loan again, since creditors mostly watch for a few years of good, timely payments on bills. A solid payment history through a low-limit secured credit card is one of the ways to reestablish credit.
A more significant challenge will be obtaining a comfortable loan. You don't want to be required -- based on your past credit history -- to pay interest rates so high that it is difficult to stay current with payments.
"Although there are downsides to bankruptcy, keep in mind that it is the right option for some people," added McGrigg, noting that it makes sense to have an attorney, even though not required, especially if there are complexities. "For some folks there just isn't going to be a scenario in which they can pay off their debts."
While illness, divorce and loss of employment are the primary drivers of bankruptcy filings, a lack of personal financial control often plays a hefty role. A persistent problem in weak economic periods when people would rather forget all about finances is putting problems out of sight and out of mind.
"The best way to avoid bankruptcy is to stay on top of your finances," said
Cunningham said that if you've gone on a "mindless spending binge," then following this careful process will bring you back to reality. Nothing wrecks a budget like an unplanned expense. The most proven way to ward off bankruptcy is to save money. You should sock away any "found money" so that it can sustain you if medical or other unexpected financial problems arise.
"In my 25 years in credit counseling, I've never once met someone who said they'd saved too much," said Cunningham. "The millions who have lost their jobs are ever so thankful for any savings they had built up."
If your finances seem to be turning bad, do not delay reaching out for help in the form of professional assistance, she said. If you wait too long, your financial hole just gets deeper and more difficult to resolve.
Sitting down with a trained, certified credit counselor at a legitimate nonprofit agency will either assist you in finding a way out or confirm your suspicions that bankruptcy is really your only option. "Either way, you'll feel better as a result," concluded Cunningham.
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