Avoid Bankruptcy - Myths, Reality and Alternatives

In the year 2006, the total number of bankruptcy filing was 1,794,795. Bankruptcy is becoming the most convenient and easy way out for people who are facing financial troubles. However, majority of them are not aware of two very important things:

• Bankruptcy is not a viable solution for all the people who have overwhelming debt.
• Bankruptcy has far reaching and long term consequences that can affect adversely on an individual's life.

So, let us look at the various aspects of bankruptcy and why one should avoid bankruptcy.

Definition of bankruptcy

The term "bankruptcy" is derived from the Italian word "banca rotta", meaning broken bench. It is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. However, there are specialized units for bankruptcy in each federal district court. Under the Federal Bankruptcy Act, these district courts take care of the bankruptcy filings & other functional procedures.

Types of bankruptcy

According to the Title 11 of U.S. Code, Federal Bankruptcy Code is subdivided into eight chapters. These are Chapter 1, Chapter 3, Chapter 5, Chapter 7, Chapter 9, Chapter 11, Chapter 12 and Chapter 13.

Chapter 7 and Chapter 13 are the most popular types of bankruptcy usually filed by a debtor.

Disadvantages of bankruptcy

Following are a few disadvantages of bankruptcy:

1. Ruined credit history: Bankruptcy creates ultimate damage to one's Credit history. It remains in the Credit report for 10 years from the date it was discharged. Not only that, it also stays in Court Records for 20 years. The worst part of this is that it reduces the chances of getting loans and jobs in the future as creditors and employers judge a candidate first hand through their credit report.
2. Property repossession: Declaring bankruptcy can result in losing valuable assets (non-exempt property) or equivalent cash value. You may need to part with your most treasured property.
3. Stained social status: Personal bankruptcy can spoil your social status.
4. Damaged business: Filing of bankruptcy by a business owner can shatter all chances of a growing business. The damaged credit rating due to bankruptcy will not make him qualified for business loans.
5. Serious financial crisis: After being declared a bankrupt you can expect all your bank accounts, credit cards etc to be closed. Anything that you might be leasing, or buying on hire purchase, such as your car will be immediately returned to the owner. This can however give birth to tremendous financial crunch.
6. Hampered aspects of life: People who have declared bankruptcy may find it extremely difficult to buy or even rent a home; acquire insurance, security clearance and buying or leasing a car. This can lead to a lot of problems & put a big question mark on the chances of having a standard & secured living. It is thus advisable to avoid bankruptcy for a safer future.

Why do people file for bankruptcy?

The following factors seem to influence bankruptcy, in general. But a combination of all these factors is however found to have greater impact on bankruptcy.

1. Rising unemployment: Unemployment or sudden loss of job is a key factor influencing bankruptcy. In order to maintain an optimum standard of living, unemployed people are more prone to taking debt without the ability to pay back.
2. Divorce: Rising divorce rates are seen to have influenced the number of bankruptcy filings. This is because in most cases one or both the parties suffer financially due to legal separation.
3. Credit card usage: The more the number of cards, the more will be the amount of debt. With the increase in the number of accounts used by each adult, there is a rise in the rate of filing bankruptcy.
4. Debt income ratio: With the rise in debt-income ratio, rate of filing bankruptcy has also increased.

Myths about bankruptcy

Bankruptcy may seem to promise a lot on the surface, but deep down it causes a lot of damages. Here is a listing of certain common misconceptions about bankruptcy:

1. Get rid of all debts: Don't ever think that bankruptcy can help you take care of all debts. There are some debts that cannot be discharged under a bankruptcy proceeding. Most of the tax claims, alimony, child support etc. are just a few examples.
2. Fresh start: Bankruptcy relieves the burden of debt temporarily. It doesn't offer a fresh start as bankruptcy reflects in the credit reports for the next 10 years. Creditors and dealers discard loan applications from the borrowers who have filed for bankruptcy. And even if they grant the loan, they charge high interest rates.
3. Include only selected accounts: If you think that you have the freedom of hiding any account and not including it while filing for bankruptcy, you are absolutely wrong. The bankruptcy laws are very strict on this point and any such fraud is punishable. You can keep accounts away from bankruptcy filing only if you can pay them off fully before filing bankruptcy.
4. Ease in filing: The process of bankruptcy is not as easy as it seems to be. It is very time consuming. Moreover with the changes in the statutory laws, it may not be that easy to file for bankruptcy.
5. Debts wiped out for free: The process of bankruptcy makes one debt free either by liquidating one's assets or by putting him into a new repayment scheme.

How debt consolidation is a better choice than bankruptcy?

You can avoid bankruptcy by choosing debt consolidation, as the latter makes you debt free with a lot of extra benefits:

1. Permanent Solution: While bankruptcy offers only a temporary relief, debt consolidation provides a permanent solution to your debt problems.
2. Minimized Debt: Debt consolidation can reduce your debt amount to as good as 40-60%.
3. Easy monthly payment: Debt Consolidation allows you to pay off your debts in easy monthly installment.
4. Clean Credit Report: Debtors opting for debt consolidation program can have renewed accounts and clean credit report once the debt is paid off.
5. Freedom from Creditors: In a debt consolidation program, you are not dominated by the creditor, as the consolidation company takes care of dealing with the creditors.

Whether you can avoid bankruptcy and take up any other debt solutions depends on your debt situations. But bankruptcy should be chosen only when other options fail to work. The option best suited to your debt needs can only be judged by a debt counselor. Remember that it is always better to rely on professionals in such cases as one wrong step taken can result into a thousand troubles.