Today more people than ever are turning to personal "bankruptcy" as a way of solving their financial problems. Estimates indicate that 2005 will see nearly 1 in 60 Americans filing for bankruptcy. People owing as little as $6,000 are unknowingly filing, not knowing of alternative methods of eliminating their debt.
The reason people take this hasty action with such a low debt amount is harassment and overwhelming pressure from impatient collectors trying to recover their money. In case of Consumer Credit Counseling agencies, once they find that they are unable or unwilling to help, they will suggest "bankruptcy" as answer - unconcerned of effect it will have on your future.
In bankruptcy, a court order forces all commercial creditors to cease and desist from attempting to collect debts you owe them. Depending on bankruptcy declared (Chapter 7 or 13), it stops wage garnishment, reverses judgments, and generally wipes out debt.
For some people, bankruptcy is only sensible option. If you have $60,000 in debts, and you'll never earn more than $1,200 per month, then you're broke! The sooner you eliminate debt, sooner you'll have a fresh start. With more than 1.4 million bankruptcy filings in 2000, Congress is passing legislation that will make it tougher to declare bankruptcy.
In "bankruptcy", certain personal property is treated as exempt. The banks and creditors cannot touch that property in attempting to recover money owed to them. Your home, car and other personal effects like clothing, and other assets are considered exempt, but this varies from state to state. Any property that is not exempt is liquidated and distributed to creditors under supervision of court. Since most people entering bankruptcy have only exempt property anyway, there's usually nothing left to distribute, so creditors typically get nothing.
Seems like a good deal? Many people mistakenly see bankruptcy as a good, low cost way to rid themselves of debt. There are other costs associated with bankruptcy that make it a very bad solution for most people. The cost of filing bankruptcy itself is minimal. Depending on what state you live in, you can expect to pay anywhere from $400 on up to $1,600 for whole process. That's just beginning. The bankruptcy will stay on your credit report for 10 years - and on your court records for 20 years. The seemingly "low cost" method will cost you dearly as it will follow you for rest of your life. If you ever apply for a loan, job, apartment or insurance, one of first questions normally asked is "Have you ever filed for bankruptcy?" And, for rest of your life, you'll have to answer "Yes."