Bankruptcy Is the Answer for Many 

The last resort

You can’t make your mortgage payment. Or you’ve lost your job and are faced with a mountain of credit card debt. Either way, you’re a casualty in the nation’s economic avalanche and you find yourself contemplating the last resort — bankruptcy. Bankruptcy is a choice more and more Americans are willing to make these days. Bankruptcy filings peaked in 2005, when more than 2 million American individuals and businesses rushed to file before a more creditor-oriented law went into effect, according to AACER, a bankruptcy data firm. Filings fell considerably in 2006 and 2007, but in 2008 climbed back up to 1.1 million.

The larger economic picture

The vast majority of filings are personal bankruptcies. The swelling tide of foreclosures is taking its toll. People are struggling in today’s economy, and it’s showing up in the bankruptcy courts. According to AACER, in February of this year, bankruptcies took their biggest year-over-year jump – 37 percent – since the bankruptcy law changed in 2005.

Coming soon to a debtor near you

Bankruptcy can offer a fresh financial start, although it will remain on your credit record for up to ten years, which may make it impossible to obtain competitive interest rates on loans. Many people, however, already have poor credit records when they file and have nowhere to go but up. So, how do you know when it’s time to file? There are no hard and fast formulas, but here are some common indicators:

• You are dipping into your retirement savings regularly.

• Your wages are being garnished by creditors.

• You have large credit card debts and are able to make only the minimum payments.

• Your house is in foreclosure proceedings.

A little something for everyone

Home ownership status and income level are some of the factors in determining whether you file a Chapter 7 bankruptcy or a Chapter 13. Under Chapter 7, many if not all of your debts can be canceled, with exceptions including unpaid child support, student loans, and some kinds of taxes. If you have regular income in excess of a certain amount, you may have to file under Chapter 13, which involves paying back some or all of your debts over a three- to five-year period.

Chapter 13 can be the preferred route if you want avoid a foreclosure, and if you have significant equity in your home or car. In a Chapter 7 case, you remain at risk of foreclosure if you can’t bring your past-due mortgage payments current. In Chapter 13, you can pay your mortgage arrearages over three to five years.

Also, Chapter 13 allows you to keep some kinds of non-exempt property that you would have to give up under Chapter 7, including equity in your home and car. But many people who file under Chapter 13 fail to complete their debt repayment plans and end up converting to Chapter 7, sometimes losing the houses and cars they were trying to keep.