What to Consider When You Consider Bankruptcy

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted to curb perceived abuses of the bankruptcy system. At that time, many people were afraid that the new legislation would limit their ability to seek bankruptcy relief, and 2 million Americans rushed to file before the new law went into effect that fall.  Afterward, it looked as though the volume of filings would remain low for a while, but the recent downturn in the economy has filings on the rise once again.

Why do I think this might be the case? Let’s look at some statistics for a moment.  More than 600,000 Americans filed for bankruptcy protection in 2006, and in 2008 the number of filings rose to more than one million.  In the first quarter of 2009, there was a 38% increase in filings compared to a year earlier, leading some bankruptcy experts to believe that as many as 1.6 million Americans could seek bankruptcy relief in 2009. The numbers could surpass 2005’s if bankruptcy judges are ever granted the authority to change the terms of the first mortgage to reflect current market rates.

There are a number of events that commonly lead to bankruptcy, including medical emergencies, a reduction in income or job loss, a divorce, or a personal business failure; therefore, it should come as no surprise that filings are growing at such a rapid pace.  However, is bankruptcy the right option for you?  Experts agree that bankruptcy should be considered as an absolute last resort, although some would recommend avoiding it altogether.  The reality is that bankruptcy exists to help you in difficult financial times. I would simply advise that you consider all possible remedies.  If you sense that your finances are becoming a problem, your first call should probably be to a non-profit credit counseling service to speak with a certified counselor.  Ask for a comprehensive review of your situation to help you determine the best course of action.  They might be able to provide you with some less painful alternatives.

The bankruptcy process can be complicated and often has far-reaching consequences. If you’re considering bankruptcy, you should also consult with an attorney who specializes in this practice. The 2005 changes to the bankruptcy code require attorneys representing bankruptcy filers to conduct a thorough investigation of their clients’ finances, and they can be held liable for inaccuracies. As you might imagine, this has also caused some attorneys to raise their fees. Don’t let this deter you. Depending upon the chapter you file, the notation will remain on your credit report, and may affect your credit score, for some time. Chapter 7, or liquidation, remains on your credit report for 10 years, and Chapter 13, or restructuring, will be reported for 7 years.  With that in mind, having a guide working on your behalf is definitely advised.

For more information, or to speak with a certified credit counselor please contact Cambridge Credit Counseling at 800-897-2200 or www.cambridgecredit.org.


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