Three Reasons to Avoid Bankruptcy

In a struggling economy with millions of American out of work and behind on their bills, debt burdens are piling up for many consumers. One of the options that many people consider when they have serious debt problems is bankruptcy. Bankruptcy is the right choice for some consumers. But there seems to be a new line of thinking that bankruptcy is an easy way to make debt problems disappear. Unfortunately, the new problems that are created with bankruptcy are not always considered by those tying to wipe their slate clean of debt.

Here are 3 Reasons to Avoid Bankruptcy:

New Loans Will Cost You, If You Can Get One At All: Most common bankruptcies can be seen on your credit report for ten years after they are filed. There are many lenders who will not give an applicant the time of day if there is a bankruptcy in their credit history, and who can blame them. A borrower with a bankruptcy demonstrates that at least once before, they weren’t able to pay back what they borrowed. If you can get a lender to look at your case, you’re likely to be offered an interest rate that is as much as 50% higher than for borrowers with healthy credit.

Unsecured loans, such as credit card lines or signature loans will be nearly impossible to get, as most lenders will need you to put some collateral on the line to reassure them about your ability to repay the loan. There are secured credit cards available, but the fees and rates associated with these cards make them a very costly alternative.

New Rules Make Bankruptcy Filing More Difficult: As of 2005, there are new rules for people considering bankruptcy that make filing more difficult and costly. These changes include a longer list of debts that can’t be eliminated through bankruptcy and requirements that those filing for chapter 7 or 13 bankruptcy submit to six months worth of credit counseling before they can file. Consumers filing for bankruptcy are also now required to take a course on money management after they file.

The idea behind these changes is that bankruptcy is not supposed to be a quick, easy solution. It is designed to be used by borrowers with very serious debt burdens, and borrowers with debt issues that are uncomfortable but manageable should work to reduce their debt through other avenues and make bankruptcy a last resort.

Bankruptcy Won’t Make All Of Your Debts Disappear: There are certain  debts that you will still be responsible for even after you file for bankruptcy. For example, student loans and back taxes (within three years) are still yours to pay after a bankruptcy. Even though collectors might ease up in their efforts to collect from you, a bankruptcy won’t make them disappear entirely.

In select cases, bankruptcy is the right option, and sometimes it’s the only option. With any bankruptcy, it’s vital to change your habits and make sure that you’re not repeating the same mistakes that led you to bankruptcy in the first place. Bankruptcy is a financial tool, not a personal bailout plan. Understanding the consequences of a bankruptcy filing can help you to make an educated decision about whether or not bankruptcy is the right move for you.