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Bankruptcy

What To Consider Before Filing

Some people think of bankruptcy as an easy way to offload a crushing debt burden, and it's sometimes the first method they reach for. Well, it may well relieve the burden, but it's far from easy and should be the very last thing you use to do so.

While the law has made it relatively easy to actually file papers, the process - like any legal proceeding - is far from painless. You will have to justify your filing, exposing all your financial history to a judge and opening it to objections by creditors. If you genuinely owe the money, they're unlikely to settle happily for 10 cents (or less) on the dollar.

Even if you're successful, there are multiple long-term impacts that you'll want to consider carefully before taking such a drastic step.

You will lose any credit cards that have outstanding balances, and others may choose to close your accounts. You'll also find it near impossible to get a home loan or other large credit line (except possibly at the kind of ruinous interest rates that probably led, in part, to your current situation).

Also, not all debts are covered even by a bankruptcy filing. Student loans, back taxes within the past three years and select other debts are generally exempt from bankruptcy protection.

That situation will persist for 10 years, during which time you will need to maintain a near perfect credit record in order to work your way back to a useful level of trust. Potential creditors will regard any bankruptcy as the most negative criterion on any credit report - even beyond a low FICO score.

Beyond the credit impact, you may actually be required to forfeit real assets - a boat, expensive jewelry and other items - depending on when they were acquired. Most states make an exception for the primary residence and your auto. If you have secondary property, that may not be protected, however.

Finally, of course, the bankruptcy procedure itself is not free. Courts always have required fees and if you use an attorney that too will cost you. That can add the final straw to an already very bad financial situation.

On the upside, you will obtain relief from debt collection efforts (provided they receive notification). Your wages can not be garnished and any foreclosure action will be stopped. By taking action sooner rather than later, you will start to build a new credit history that can be better than the past one.

Since you won't have access to new credit cards, this can actually be an advantage. There are some people who simply should not have access to easy credit, until and unless they can find a way to change their habits.

It can serve as a huge wakeup call to change any bad money management habits. For some, it's necessary to hit rock bottom before they find the inner strength to make large, positive, long-term changes.

But, hitting rocks is painful. Consider carefully before you take the plunge.

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