The reasons to avoid bankruptcy.
The number of people filing for bankruptcy in 2006 was 617,660 – in 2007 that number increased to 850,912. Bankruptcy is turning into the most convenient option for people who are facing severe financial problems. However, strikingly, the majority of these people are ignorant of two very significant factors. One, bankruptcy is not the best solution for all people who are burdened by debt. Two, bankruptcy has long term consequences that can have a negative effect on your life forever.
What is bankruptcy and why you should avoid it
The definition of bankruptcy is a federal court process that exists to help businesses and consumers repay their debt or eliminate their debt under the protection of bankruptcy court. The term bankruptcy comes from the Italian work ‘banca rotta’ which means broken bench. District courts take care of bankruptcy filings and procedures under the Federal Bankruptcy Act.
Types of Bankruptcy
There are eight chapters of the Federal Bankruptcy Code. These consist of Chapter 1, Chapter 3, Chapter 5, Chapter 7, Chapter 9, Chapter 11, Chapter 12 and Chapter 13. Chapters 7 and 13 are the most popular bankruptcies filed by debtors.
The following are a few drawbacks to filing for bankruptcy:
- Credit History: Bankruptcy is one of the worst things that can happen to your credit history. It stays on your report for up to 10 years and stays in court records for 20 years. The damage it creates goes further than just your credit report; it severely limits your ability to receive a loan and employment as banks and employers typically judge you by your credit report.
- Repossession: Discharging a bankruptcy can cause you to lose valuable assets and money.
- Social status: Personal bankruptcy can ruin your social status.
- Business reputation: Businesses that file for the protection of bankruptcy stand to lose more than their reputation, they also lose all chances to grow their business. Their credit rating will deter banks from qualifying them for future business loans.
- Financial: The most serious consequence to bankruptcy is the closing of all your bank accounts, credit cards, and more. Anything you are currently buying through financing or leasing, like your car, will be returned to the owner.
- Life conditions: People who declare themselves bankrupt will find it difficult to buy a home, rent an apartment, get insurance, or buy a car. These conditions are extremely difficult in today’s world.
Because of these reasons and more, it is worth it to avoid bankruptcy for a more secure future.
Why do people file for bankruptcy?
- Unemployment: The sudden loss of a job definitely has an impact on the decision to declare bankruptcy. In order to keep a certain standard of living, people who are unemployed are more apt to accept more debt without the ability to pay it back.
- Divorce: When a couple separates or divorces, one or both parties typically tends to suffer financially. This seems to also be directly related to the rise in bankruptcy.
- Credit Cards: There is a direct correlation between the number of accounts used by an adult and the rise in the rate of filing for bankruptcy. The more cards that a person has, the more debt will be accrued.
- Debt-income ratio: This ratio is the percentage of a consumer’s monthly gross income that goes towards paying debts. As this rate rises with the general public, the filing rate for bankruptcy has also risen.
Common Myths About Bankruptcy
Bankruptcy seems like an easy way out of debt, but the reality is a lot worse than most people realize. Following is a list of common bankruptcy myths:
- You will eliminate all debt: Bankruptcy will not get rid of all your debts. There are some that cannot be discharged in bankruptcy like taxes, child support, alimony, student loans, etc.
- You will have a new beginning: Bankruptcy does not put you back at square one – it actually puts you at a negative beginning. As bankruptcy will be reflected on your credit report for 10 years, creditors will not be able to offer you credit terms – and if they do, they will cost a lot in interest.
- You can still keep some accounts out of bankruptcy: There are very strict bankruptcy laws that include stiff punishment if you try to hide or not include any accounts. The only ones you don’t have to include with filing for bankruptcy are ones that you will have paid off before you file.
- It’s easy to file for bankruptcy: Filing is extremely time consuming, as well as expensive. Recent law changes also make it much more difficult to file as well.
- Debts are removed for free: Bankruptcy makes you debt free only by liquidating your assets – which could mean losing your home, car, etc.
Is debt consolidation better than declaring bankruptcy?
Debt consolidation can actually make you debt free with more benefits. It can be a permanent solution to your burdened finances, while bankruptcy only provides temporary relief. Consolidating your debt can reduce your monthly payments by 40-60%. Your credit report will be repaired as soon as your debts are paid for – not for the next 10 years like with bankruptcy. You will also be free from the hounding of creditors. In short, bankruptcy should only be chosen when there is no other choice. Debt counselors can help with these decisions as well.
For more information on this topic or if you need immediate debt help please visit http://www.debtrelief.us.com Use the debt calculator to see how much debt you can eliminate.