There's any number of reasons that the number of personal bankruptcy continue to go up exponentially every year - spinning ever close to two million per annum according to government statistics. Credit lines and credit cards are more available than ever to people of all sorts of qualifications, the adjustable rate and negative amortization loans that inspired our current mortgage lender crisis has led to many homeowners' mortgage bills increasing monthly, national unemployment continues to rise - even the spiraling divorce rate, as partners wish to discharge mutual debt-loads, has helped send bankruptcies to historic levels of acceptance.
As most people know, the government's bankruptcy program - now a century old - offers legal protection for debtors unable or, at times, unwilling to repay most forms of unsecured debt. Spousal and child support, tax liens, student loans, court-assessed penalties following criminal trials, and other forms of debt are considered un-dischargeable, and secured debt (loan or mortgages on cars or homes that can be repossessed or foreclosed upon) can't be touched. For credit card debt or personal loans, bankruptcy protection can, in some circumstances, eliminate debt for those facing genuine financial hardships.
In America, bankruptcy protection has evolved into a number of different forms. Municipalities and governmentally-controlled utilities, for example, can take Chapter 8 bankruptcies, and Chapter 12 exists for family farms or family fishermen. There's also several programs for businesses, but the grand majority of consumers attempt either Chapter 7 or Chapter 11. Actually, these days, most attempt to take out a Chapter 7 - that's the traditional sort, where all applicable debts are liquidated - are turned into a Chapter 11 bankruptcy intended to re-structure existing debts by merely reducing balances and forcing borrowers toward three to five year payment plans.
2005 legislation has greatly limited borrowers' opportunities for bankruptcy. Borrowers can only qualify for Chapter 7 bankruptcies if their income's deemed less than the median income for their specific state (regardless of the malleable nature of most modern incomes through bonuses and seasonal bumps or the great differences in regional income found in the wealthier states; salaries in Bakersfield or Fresno rather lower than San Francisco or San Jose). It's extremely important that anyone even considering bankruptcy discovers their particular state's median income level and compares that to the specific period that the IRS would look at when declaring for protection. Too many borrowers do not understand how greatly the bankruptcy laws have changed in recent years.
For one thing, even as access to credit cards for previously unqualified consumers has dramatically risen the past decade, demonstrably bad credit (and nothing seems as damaging as a bankruptcy) can absolutely ruin the financial destiny of young families or remove the last hopes of older borrowers. A declaration of any sort of bankruptcy may stay upon the borrower's credit report for up to ten years, with accompanying drop in FICO credit scores, and the negative effects of such notations can't be over-stated. Record of bankruptcy could prevent consumers from continuing their education, purchasing homes, renting apartments, leasing vehicles, and any number of avenues we ordinarily take for granted. Credit reports, this modern world, determine whether applicants are considered for employment, whether they receive security clearance, even, in some cases, whether they're accepted in dating sites. Entering bankruptcy may also mean avoiding all those expected aspects of life in which credit's so terrible important.
As another example, all those seeking bankruptcy now have to take a class on credit before they may even file and a class on debt-management before they'll be successfully discharged - both courses paid for at the borrowers' (often considerable) expense. Furthermore, while borrowers have always had to list their possessions and assets when filing for bankruptcy, the federal government now determines the value of all such possessions by the potential replacement value. Using replacement value instead of, as in previous years, actual resale value that consider depreciation makes it all the more likely that the courts will seize household items or family heirlooms for auction in order to partially repay creditors. Few consumers declaring bankruptcy recognize that they may risk the loss of all accumulated goods and possessions, and there's countless stories of helpless filers witnessing their most-loved property be sold only to wish they'd tried harder to avoid bankruptcy when they had the chance.
As potentially dangerous as Chapter 7 may seem, though, at least successful completion of the program will eliminate much of the borrower's unsecured debt. As has been mentioned, Chapter 11 bankruptcies only re-structures the debt. Balances are reduced but never by more than fifty percent and often much less. Obviously, this creates the same problems for the borrowers as before they even filed for bankruptcy protection. In many cases, repayment can be even more difficult due to the lessened time schedule. Essentially, the courts take a look at one part of the borrower's past income and, from that, extrapolate availability to repay the creditors. This is another situation where salaries which depend upon seasonal increases or bonuses can be unfairly analyzed depending upon the specific period of annual income that the courts may study.
Even if the trustee does take fair assessment of the debtor's incomes, the problems with Chapter 11 bankruptcy do not stop there. In much the same way as Chapter 7 qualifications depend upon the specific income median for the debtor's state, the living expenses have been calculated by the Internal Revenue Service with each state in mind (avoiding the difference in rental costs or home ownership prices in, say, Jacksonville and Miami). The significant distinctions between the IRS' arbitrarily set living expenses and the day-to-day actualities of what people genuinely need in order to survive tend, as you might expect, to be ignored by the courts. In this way, families are forced to move residences, change vehicles, or even take their kids out of the school of their choice. Far from an easy and painless alternative to changing one's lifestyle, the mounting bills must still be paid, but, under Chapter 11 bankruptcy protection, court-mandated officers instead determine your families' spending habits for up to five years.
Those spending habits, for most Americans considering bankruptcy, are the real culprit. To be sure, a number of borrowers suffer genuine financial horrors - from accidents to illness to unemployment to familial strife - but even they should take a long look at their personal economic plan to see if there aren't ways they could cut back. Too many bankruptcies are undertaken because the consumer in question has fallen prey to advertisements and overall cultural decadence leading toward mortgage futures. Borrowing from Peter to pay Paul, in days past, was thought the peak of self-destructive behavior; nowadays, taking out cash advances from one card to meet the minimum payments requested by another is seen as the price of living within the modern economy.
After all, consumers don't just suddenly assume thousands of dollars of debt. Leaving aside those that have suffered honest hardships with hospital bills impossible to have predicted, the towering debt-loads of most Americans slowly accumulated over a lifetime's whimsical purchases. Spending beyond one's means has become almost sanctified within our national character. We're taught to buy whatever we want, whatever the consequences, and the resulting national debt shouldn't come as a surprise. Inevitable, cards with initially low rates soon spiral to fifteen or twenty percent, borrowers take out other cards just to help with existing payments, spending becomes an addiction as deadly as any other, and, seemingly overnight, bankruptcy seems the only possible option.
The obvious solution would be to avoid the original charges or, before the mounting bills face external assistance, start budgeting for wants and needs in order to limit potential debt-load increases. Secured credit cards are an immediate help. Since the potential credit balance available upon secured credit cards only equals how much money the card-holder has already paid to the card, there's no possibility of adding to debt while still taking advantage of the convenience of credit cards and those services that only take plastic. Strip life down to the essentials: food, housing, and utilities. For many families, vehicle expense and clothing budgets could be temporarily minimized by taking advantage of public transportation or second-hand stores - even food budgets, with the help of a new mindset, can often be greatly reduced by cooking at home and purchasing fewer pre-packaged items. The resulting menu might not be as desirable, but anything that avoids bankruptcy should be encouraged.
In the same way, many debt problems are caused by over-eager home ownership among borrowers that haven't yet the proper cash-flow to actually afford the home of their dreams. Unfortunately, this often involves taking out loans with minimal (sometimes non-existent) down payments and surrendering to the worst machinations of loan officers absent ethics. Adjustable loans only paying down interest might seem reasonable the first year or two, but, as the rates inevitably go up and the balance, since the borrower's only paying most of the interest, rises, most every home-owner without a sudden windfall finds themselves no longer able even to re-finance for longer terms. It's understandable, of course, and more the fault of predatory lenders. The national dream's still to own a home of one's own, but the resulting monthly payments and inevitable foreclosure can too easily become a nightmare.
After the fact, it's easy to see how bankruptcy could have been avoided. Proper financial management, a reluctance to purchase luxury goods or entertainment until savings have reached a set limit, and reasonable housing expenses really do make all the difference. Of course, for some, it's already too late - and, to be fair, unforeseen medical expenses or unemployment renders such advice meaningless. If the stack of bills simply can't be dealt with and the minimum payments of revolving debt reaches near one-half of gross monthly income, something has to be done. Still, though, there are alternatives to bankruptcy and ways the loss of possessions or living under a court-mandated budget can yet be avoided. While they may be overwhelmed by un-met payments and harassment from collection agencies, the responsible borrower should still research every alternative to bankruptcy.
Most Americans have already been inundated by advertisements for consumer credit counseling agencies - these, actually, are rather similar to the Chapter 11 bankruptcy program. Borrowers still must pay the great majority of what they already owe, artificially shortened payment terms may make the process even more difficult (regardless of negligible reductions in balance or temporarily lowered interest rates), and the effect on their credit's not much more different than that of bankruptcies. More worrisome, many of the consumer credit counseling agencies are, despite fees collected from debtors, also paid by the credit companies - with clear question to which master they actually serve.
Debt settlement firms, on the other hand, only work on behalf of their borrower. In the simplest form, they look at a debtor's potential for repayment and, with experience dealing with each sort of lender, negotiate an immediate reduction in the amounts owed as well as an end to calls from collection agencies or threats to garnish wages. There's still a repayment program, but it's far more beneficial to the client and recognizes how their income flow may change from month to month as well as the expenses (an ill child, say) that cannot be eliminated so easily. Specific results depend on each borrower's situation, but successful negotiations typically remove around forty percent of total unsecured debt-load with relatively minimal effects to credit reports or FICO credit scores.
While every borrower needs something different for their own peculiar financial crisis - and, especially, while remembering the best solution toward avoiding bankruptcy's simply never to allow consumer bills to attain such control over borrowers' lives - it's, again, just a good idea to see what other options exist. In the wake of America's mounting credit crisis, a number of alternatives have develop even as the ability to declare bankruptcy has been so greatly restricted. There's no one good answer besides household frugality, but every consumer should at least remain aware of what other solutions exist.
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