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Credit - Head Matters


4. Identify Ways to Avoid or Correct Credit Problems

d.    Describe the Negative Consequences of Bankruptcy

If you’ve not been successful  managing your debts or reducing your debt load in the past—and you want to “just start all over again” with all your debts wiped away—bankruptcy might sound like a great way to make your dreams come true.  But we offer a word of caution: The consequences of bankruptcy are numerous and severe.

In health terms, bankruptcy is a sedative that gives some short-term relief from your immediate pain.  Keep in mind that, if bankruptcy were an operation, the hospital performing it would require you to sign a waiver after reading a long list of its serious side effects. Here’s a summary of some of the more prickly ones.
  • A bankruptcy statement will generally show up on your credit report for 10 years. This indicates that you had problems paying your debts in the past and lenders are much less likely to give you a loan or a credit card.
  • Bankruptcy does not forgive all debts. For example, it does not forgive debts such as those arising from alimony, child support, property settlements between spouses, federal student loans, court restitution orders, criminal fines, and certain taxes.
  • Bankruptcy is part of the public record and many employers check the credit report of potential employees. While it is against the law to discriminate against a person who has filed for bankruptcy, an employer can check to see how the person handles personal finances.
  • If you file bankruptcy, you will have a difficult time getting a new credit card or loan.

Note that in the past, Chapter 7 meant a near total elimination, or discharge, of debts, Chapter 13 required a debtor to “restructure” debt and repay some or all debts. Since a change in the laws in 2005, new anti-debtor provisions include:
  • A strict financial means test for people filing for Chapter 7. While Chapter 7 previously allowed for elimination of all debts, not so any more. The intent of the “means test” is to require people with enough money to pay their creditors to do so by not canceling all debts.
  • A requirement that all debtors must receive a briefing from an approved credit counseling agency at least six months before they can file a bankruptcy case.
  • A requirement that debtors take an approved class on debt management before they receive their bankruptcy discharge.
  • A provision making it easier for the court to dismiss a case outright or to convert a Chapter 7 case to a Chapter 13 case, which requires the debtor to repay at least some if not all debts.
  •  A provision permitting a court to impose sanctions on attorneys, or even on debtors, for filling a Chapter 7 case that is dismissed or converted to a Chapter 13 case, which requires a repayment plan.
As you can see, the scars of bankruptcy do not heal immediately and never completely. Therefore, you should not undertake bankruptcy without getting a professional opinion and, first, exploring less traumatic therapies.

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