Wednesday, March 16, 2005

To Bankrupt Or Not To Bankrupt?

Bankruptcy is a very important legal option open to U.S. Citizens who have serious financial problems from which they cannot reasonably recover given their current circumstances. There are two types open to individuals: Chapter 7, sometimes know as a 'straight' or 'liquidation' bankruptcy and Chapter 13, also called 'wage earner' or 'repayment plans'.

You can get a lot of bankruptcy information from your State Bar Association, some of whom publish informative articles online. Office supply stores also carry Do It Yourself Bankruptcy Kits. You have the right to represent yourself in court, however the complications of this area of law elude most of we mere mortals. It helps to read up on the implications for you personally before you make a decision that could affect the rest of your credit lifetime.

Credit Counseling: A Word of Warning:
There are a number of 'credit counseling agencies' and 'debt elimination firms' that may essentially allow you to lapse into a form of bankruptcy that does more harm than good to your credit. Several of these firms are being investigated for fraud and misinformation. They have been known to approach unsuspecting people with good credit scores and use scare tactics to take over their payment plans, thereby ruining their credit.

It pays to become informed of your options and while I don't personally recommend any firms, there are some very good sources for credit counseling. If you simply need help deciding which way to go...the best place to start would be with a good Certified Public Accountant! Lenders really don't like credit counselling agencies and will often treat this as a bankruptcy. They will insist that you are out of the counselling period before funding a mortgage. Not all credit counsellors register as a creditor on your credit ask if they do before you commit to working with them. Those that don't may be worth a try!

Seeking An Attorney's Advice:
Fortunately, a number of law firms specialize in bankruptcy for a flat fee and this is a popular option. Be sure to ask around--a local attorney who doesn't handle bankruptcies should know who has a good reputation in this field. Many offer a free first visit to discuss your options. I always suggest getting more than one opinion on a matter that is this important to your financial future. The difference in a thorough BK lawyer and a lackadaisical one will be reflected in the final result and could impact your future credit report. I have seen evidence of poor BK management with charges still reporting on a client's credit report that should have been removed in the BK process.

Every person and situation is different so your filing should be carefully considered. An attorney can advise you of the long term implications and prepare the necessary documents. They will also accompany you to court and help you make informed decisions.It's also very important that you feel comfortable with the lawyer you choose. Interview more than one! The emotional side of bankruptcy is hard enough so you deserve someone you feel is empathetic to your personal situation.

Chapter 7 is the option most people chose when their resources are not sufficient to cover their debts and attempts to manage them further would be fruitless. There are many rules regarding who can claim Chapter 7 and how.

Chapter 13 is essentially a court managed re-payment system. Chapter 13 gives an individual a specific time frame in which to make good on debts, to dispute debts and make efforts to repay those they feel are justified. This procedure stops creditors from continuing to rack up interest charges and legal fees as time progresses.

2005 News: The U.S. Congress voted in 2005 to enforce a 'means test' on individuals who claim bankruptcy to make the process harder for individuals to escape responsiblity for their valid debts. Any responsible lawyer will advise you on which option makes the most sense given your current economic situation. Most will advise that you work with a CPA (certified public accountant) before taking on your case. The Federal Bankruptcy laws changes have made it much more difficult to 'write off' your debts.

Even though you cannot claim bankruptcy for another 7 years, some people use this as an unfortunate form of 'financial planning' . One reason given for the motion before congress is to prevent gamblers, drug dealers and other criminals from avoiding responsibility for paying their court fines and legal fees. Of course, lawyers could choose themselves to be more stringent in whom they represent--but our system of rules seems to require rule enforcers.

A clean slate: Whatever decision you make, there is a point when it is time to draw the line and stop suffering from past financial mistakes or circumstances beyond your control. You deserve the opportunity to clear the slate in the manner that is most suitable to your circumstances. I have heard people say this is a very freeing experience after feeling overwhelmed for years. You can finally answer your phone without fearing who might be on the other end demanding payment.

Creditors View: Once you have satisfied a bankruptcy proceeding, you may be surprised to find creditors knocking on your door offering new credit cards! They know you can't claim bankruptcy for another seven years and are willing to risk getting you on the hook again for high interest rates. Banks that specialize in Bankruptcy Buyouts (for Chapter 13) and One Day out of Bankruptcy Loans offer some reasonable options to help you get back on your feet. Work with a trusted broker or lender who can explain and research your options.

Try to avoid Home Foreclosure if at all possible. A Foreclosure will most negatively impact your FICO Score and your ability to get another mortgage at a decent rate for at least two or more years. Most conventional lenders won't fund a Bankruptcy client for 7 years and a Foreclosure client for 10 years. Still, plenty of lenders are willing to give you a chance.

Just don't go down the same path again. Unfortunately, the truth behind the stigma of bankruptcy is that 50% of people who claim bankruptcy once do so again. The biggest question you must ask yourself is: "Have you learned sufficiently from the humbling experience of claiming bankruptcy to never go there again?" Or perhaps more aptly: "Can you forgive yourself for being human?" Hopefully, both answers are 'YES!"

Wishing you every credit sanity! Loannetter

© 2005 susan templeton loannetter