Should bankruptcy really be the last resort?

Cutting the branchA 2008 article on CNNMoney.com suggested that bankruptcy is a “last resort” for consumers. I agree that bankruptcy shouldn’t be the first option a struggling family should consider. However, filing bankruptcy is often a better solution than draining retirement savings, pulling equity out of your home to pay credit card bills, or falling deeper into debt.

1. Get the stats: Yes, BAPCPA overhauled the Bankruptcy Code in 2005. While the intent may have been to make it more difficult to file, the result has been that most people who qualified for Chapter 7 bankruptcy before BAPCPA will qualify today. Why are consumer bankruptcy filings on the rise? To steal a phrase from the early 90’s, “it’s the economy, stupid.”

2. Know the consequences: Of course, bankruptcy will adversely affect your credit score. So will repeated late payments, defaults, and foreclosure. When you seek credit following a bankruptcy, the potential lender will see the bankruptcy on your report, but it will also see what you’ve done since the filing. Have you defaulted on any loans since the bankruptcy? Have you made late payments and incurred extra fees? If not, you’ll be more likely to get credit.

The CNN article says you may lose your home or car if you file a Chapter 7 bankruptcy. Very few filers lose any of their assets in a Chapter 7 bankruptcy. See this related blog post for the reasons why.

3. Gauge your eligibility: Credit counselors cannot give legal advice. If you want to learn about all your debt-relief options, a lawyer is your best source. Once you’ve explained your situation to a bankruptcy lawyer, he/she will explain all of your options and advise which makes the most sense for you. Visiting with an attorney does not obligate you to file bankruptcy; it’s just a smart way to learn about your options so you can make an informed choice.

4. Know the Rules: The CNN author says, “if you file for a Chapter 7 bankruptcy . . . you won’t be able to save your home.” This is quite simply untrue. Most of our clients choose to keep their home and continue to make monthly mortgage payments. Again, a bankruptcy attorney can help you decide if it is in your best interests to keep your home in a Chapter 7, surrender the house, or keep the house in a Chapter 13.

If you don’t need bankruptcy, a lawyer will tell you tell you that. The time to file is before you’ve lost everything, not after. What should be the last resort, losing your home and draining your retirement savings or filing bankruptcy?

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