The reasons to avoid bankruptcy.

The
number of people filing for bankruptcy in 2006 was 617,660 – in 2007
that number increased to 850,912. Bankruptcy is turning into the most
convenient option for people who are facing severe financial problems.
However, strikingly, the majority of these people are ignorant of two
very significant factors. One, bankruptcy is not the best solution for
all people who are burdened by debt. Two, bankruptcy has long term
consequences that can have a negative effect on your life forever.

What is bankruptcy and why you should avoid it

The
definition of bankruptcy is a federal court process that exists to help
businesses and consumers repay their debt or eliminate their debt under
the protection of bankruptcy court. The term bankruptcy comes from the
Italian work ‘banca rotta’ which means broken bench. District courts
take care of bankruptcy filings and procedures under the Federal
Bankruptcy Act.

Types of Bankruptcy

There
are eight chapters of the Federal Bankruptcy Code. These consist of
Chapter 1, Chapter 3, Chapter 5, Chapter 7, Chapter 9, Chapter 11,
Chapter 12 and Chapter 13. Chapters 7 and 13 are the most popular
bankruptcies filed by debtors.

Bankruptcy Drawbacks

The following are a few drawbacks to filing for bankruptcy:

• Credit History: Bankruptcy is one of the worst things that can
  happen to your credit history. It stays on your report for up to 10
  years and stays in court records for 20 years. The damage it creates
  goes further than just your credit report; it severely limits your
  ability to receive a loan and employment as banks and employers
  typically judge you by your credit report.
• Repossession: Discharging a bankruptcy can cause you to lose valuable assets and money.
• Social status: Personal bankruptcy can ruin your social status.
• Business reputation: Businesses that file for the protection of
  bankruptcy stand to lose more than their reputation, they also lose all
  chances to grow their business. Their credit rating will deter banks
  from qualifying them for future business loans.
• Financial: The most serious consequence to bankruptcy is the closing
  of all your bank accounts, credit cards, and more. Anything you are
  currently buying through financing or leasing, like your car, will be
  returned to the owner.
• Life conditions: People who declare themselves bankrupt will find it
  difficult to buy a home, rent an apartment, get insurance, or buy a
  car. These conditions are extremely difficult in today’s world.

Because of these reasons and more, it is worth it to avoid bankruptcy for a more secure future.

Why do people file for bankruptcy?

• Unemployment: The sudden loss of a job definitely has an impact on
  the decision to declare bankruptcy. In order to keep a certain standard
  of living, people who are unemployed are more apt to accept more debt
  without the ability to pay it back.
• Divorce: When a couple separates or divorces, one or both parties
  typically tends to suffer financially. This seems to also be directly
  related to the rise in bankruptcy.
• Credit Cards: There is a direct correlation between the number of
  accounts used by an adult and the rise in the rate of filing for
  bankruptcy. The more cards that a person has, the more debt will be
  accrued.
• Debt-income ratio: This ratio is the percentage of a consumer’s
  monthly gross income that goes towards paying debts. As this rate rises
  with the general public, the filing rate for bankruptcy has also risen.

Common Myths About Bankruptcy

Bankruptcy
seems like an easy way out of debt, but the reality is a lot worse than
most people realize. Following is a list of common bankruptcy myths:

• You will eliminate all debt: Bankruptcy will not get rid of all your
  debts. There are some that cannot be discharged in bankruptcy like
  taxes, child support, alimony, student loans, etc.
• You will have a new beginning: Bankruptcy does not put you back at
  square one – it actually puts you at a negative beginning. As bankruptcy
  will be reflected on your credit report for 10 years, creditors will
  not be able to offer you credit terms – and if they do, they will cost a
  lot in interest.
• You can still keep some accounts out of bankruptcy: There are very
  strict bankruptcy laws that include stiff punishment if you try to hide
  or not include any accounts. The only ones you don’t have to include
  with filing for bankruptcy are ones that you will have paid off before
  you file.
• It’s easy to file for bankruptcy: Filing is extremely time
  consuming, as well as expensive. Recent law changes also make it much
  more difficult to file as well.
• Debts are removed for free: Bankruptcy makes you debt free only by
  liquidating your assets – which could mean losing your home, car, etc.

Is debt consolidation better than declaring bankruptcy?

Debt
consolidation can actually make you debt free with more benefits. It
can be a permanent solution to your burdened finances, while bankruptcy
only provides temporary relief. Consolidating your debt can reduce your
monthly payments by 40-60%. Your credit report will be repaired as soon
as your debts are paid for – not for the next 10 years like with
bankruptcy. You will also be free from the hounding of creditors. In
short, bankruptcy should only be chosen when there is no other choice.
Debt counselors can help with these decisions as well.