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Is Bankruptcy A Solution Or Headache?

Oct 26, 2007
One of the biggest myths is that if you file for bankruptcy you will be financially free and no longer have debt problems. Wrong! Bankruptcy is not the cure-all for getting out of debt. Over 1 million Americans file for bankruptcy every year. One in every 73 households files for bankruptcy. In 2005, 2 million Americans filed for personal bankruptcies.

Millions of Americans are in debt and get in debt every year. Many people think that filing for bankruptcy will solve all of their debt problems. On the surface it seems that if you file for bankruptcy all of your debt will be eliminated and you can start with a clean slate. Actually it is not that simple.

To file for personal bankruptcy you must reside in a state for 90 days prior to filing and have a total unsecured debt less than $290,525 or secured debt less than $871,550. The new bankruptcy law that went into effect in October 2005 states that debtors (consumers) who earn less than the median income in their state - about 80 percent of those who file for bankruptcy - still would be entitled to file under Chapter 7. But those who earn more than that and who have the ability to repay at least $6,000 over five years would have to file under Chapter 13, which requires a repayment plan.

Although it is true that after you file for bankruptcy you can purchase a house or a car, what people don't realize it that the interest rate that you will be given will be very high. Also, based on the new bankruptcy law implemented in October 2005, it is harder to file for bankruptcy and depending on the type of bankruptcy granted, it will remain on your credit report for seven to ten years. This greatly lowers your credit score and it will probably take about 3 to 5 years before you score increases due to the bankruptcy filed, and provided that you don't get into any further debt.

When you have financial problems and can't see any way out, bankruptcy looks like the best option, but there are many other options available to you. If you have a house you can take out an equity loan to pay your debts, you can reduce your expenses and create a budget for yourself, you can get a part-time job, go to school and further your education and get additional training related to your particular job, setup payment plans with your creditors or sell some of your assets if you have any.

The best consumer is an educated consumer. If you find yourself in financial troubles, the first and best thing to do is do research and find out the options available to you. Next you want to identify your assets and liabilities. Your assets are anything that you do not owe money on such as stocks, bonds, 401(k), retirement plans, etc. Your liabilities are anything you owe money on such a house, investment property, boat, car, etc. This will help to determine if you have any assets that can be sold or money borrowed against to pay off your debts. Next you need to create a budget for yourself to identify how much money you have coming in (how much you get paid each week) and how much money you have going out (how much you pay each month in bills and expenses).

If you have very little or no assets then you will need to do some quick fixes such as cutting back on expenses including: bringing your lunch to work, carpooling, catching the subway or bus to work, riding your bike or motorcycle to work, eating breakfast at home, renting videos instead of going to the movies or cutting back on how often you go to the movies, canceling your pager or cell phone service or switching to the cheapest plan available.

These things will provide extra money in a short period of time until you develop a plan for paying off your bills. If you have researched all options that are available to you and are unable to use any of them then bankruptcy should be your last resort, not your first option.

Getting in debt is the worst place to be but with time you can overcome this obstacle. Think long and hard before filing for bankruptcy. It may not be worth the headache.
About the Author
Harrine Freeman is the CEO of H.E. Freeman Enterprises, a credit repair and personal finance services company and author of "How to Get Out of Debt: Get an "A" Credit Rating for Free." Visit H.E. Freeman Enterprises
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