Bankruptcy does offer a fresh start, at a high cost
Consider all options before filing for bankruptcy, says The Credit Guy
Ask The Credit Guy
Dear Credit Guy,
How much are the lenders paying you to tell people not to file for bankruptcy? These bloodsuckers get richer by jacking up interest rates for people who hit rock bottom. It makes NO SENSE to try to get more money out of a guy who's lost almost everything. The new bankruptcy law is trying to push people to new limits. The profit the credit grantors make is obscene. I hope with the new elections on the way we'll pass law to punish these filth mongers.
I hear the frustration in your letter and to set the record straight, I receive no compensation from lenders for writing this column. Zip. Zero. Nada. That being said, our counselors and credit counselors nationwide see many people on a daily basis who feel just as you do. The other thing that the people who seek credit counseling have in common is a desire to pay what they owe.
We do not have a debtor's prison in this country and there is a reason for that. We do have bankruptcy protection laws for the same reason. In this country, we believe that people have the right to start over and begin their financial lives anew when their circumstances warrant it. Before the new bankruptcy law took effect in 2005, there were definitely people who were taking advantage of the system, which is not the case anymore. The people filing for bankruptcy who we see now legitimately need the fresh start that the system offers.
The new bankruptcy law does make it more difficult to qualify for a Chapter 7 bankruptcy, where most of your debts are forgiven and you do not have to repay them. More people must file a Chapter 13 bankruptcy, in which the court sets up a monthly repayment plans for debtors to repay creditors a portion of the debt over three to five years.
The reason that I and most other credit experts recommend bankruptcy only as a last resort is because of the personal and financial toll a bankruptcy has on a person, family, or both. A bankruptcy is reported on your credit report for 10 years. So, for 10 years, any time you seek credit, apply for a job or a promotion, rent an apartment or insure your home or car, the bankruptcy will surface. In the majority of cases, the quick fix of filing for bankruptcy ends up costing you more in the long run with higher interest rates and higher insurance costs. Few mistakes in life will stick around to rear their ugly heads for that long.
In addition, the personal toll of debt and bankruptcy can sometimes be devastating. People have committed suicide due to extreme financial problems and divorces regularly occur because of finances. Bankruptcy is viewed as a personal failure by many and one from which it is difficult to recover.
With all that said, bankruptcy protection is a necessary right and one that should be exercised when it is appropriate. For example, if you have no assets and no disposable income -- defined as any income left after paying reasonable housing, food and clothing expenses -- you may have no other option but to file bankruptcy.
My recommendation stands to explore all other options before filing for bankruptcy, but if no other option exists, then bankruptcy it is. One thing I would encourage all readers to do is seek financial education after a bankruptcy or other major financial setback to ensure that you do not end up in the same situation again.
Take care of your credit!
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997. As The Credit Guy, he answers a question about a debt or credit issue from a CreditCards.com reader each week.
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