Is Bankruptcy Really the Answer?
If your finances are in a mess, you may have considered bankruptcy. Even though your debt may be wiped clean, there are many other end consequences.
When a person’s debt has risen to a level that they can’t hope to get under control, they may consider filing for bankruptcy. For a consumer there are two bankruptcy choices: Chapter 7 and Chapter 13. Chapter 7 bankruptcies involve wiping out the debts in part or in their entirety and liquidating assets to do it. Chapter 13 bankruptcies are more of a debt restructuring plan that gives you more time and a plan to pay back a portion of the debt that is owed to creditors.
Your credit will be damaged if you file for bankruptcy, maybe for as much as ten years. If you apply for any credit during that time the creditor will be informed of the bankruptcy.
In the past, people have taken advantage of the bankruptcy laws. For instance, people have been able to file more than once for Chapter 7 bankruptcy. They have used it as their own personal “debt eliminator”.
Each state decides on what assets they will exempt from being seized during a bankruptcy hearing. Knowing that, some may use available cash to purchase those items (homes, cars, etc.) in an effort to avoid payment and still retain the stuff they purchased. In this instance, creditors receive little or nothing from the bankruptcy settlement.
This has been changed by new laws. Courts used to have free rein when it came to who could file for Chapter 7 bankruptcy. Now certain standards have to be met first. In order to be able to file for Chapter 7, your income must be below the average income of the state where you live. Your income then goes through a calculation that determines if you have enough disposable income to be able to pay back twenty-five percent of the debt owed.
More people will have to file for bankruptcy under Chapter 13. The courts will decide the amount of repayment from facts that they receive. An allowance is made for rent or mortgage, food and other relevant bills. With the new laws, the IRS regulates the value of each bill, exempts a certain amount, and payments are decided from the rest.
Lawyers are charging more than ever because declaring bankruptcy has become much more involved. The whole process will cost the client much more than before which will hopefully make them think twice about filing. Credit counseling is also required as a first step before filing bankruptcy. The counselor may be able to help you and rule out the need to file.
Filing for bankruptcy is a major issue and should not be taken lightly. Although it clears your debt, it does come with its own price tag.
