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Can bankruptcy help you?
By Dana Dratch • Bankrate.com
http://origin.bankrate.com/brm/news/debt/debtmanageguide/bankruptcy1.asp?caret=30

Bankruptcy is a tough road, best reserved for those who don't have any other options.

But it's still there if you need it.

"It needs to be used as the last resort," says Janet Garkey, editor for the Credit Union National Association's Center for Personal Finance. But the need for bankruptcy isn't confined to those with lower incomes, she says. Even middle-income families have problems financially, especially with medical debt.

Linda Sherry, spokeswoman for Consumer Action, a D.C.-based advocacy group, agrees. Bankruptcy is only "for folks who are down to the wire and can't take the debt load," she says.

And while the rules have changed since October 2005, bankruptcy is still a financial option and consumers are using it.

The rule changes "have made it more expensive," says Sherry. "Attorneys are under so much more scrutiny about what they report to the courts -- there is more due diligence than before."

But if you need bankruptcy to overcome financial problems, you should be able to get it, according to several consumer finance and bankruptcy experts. "The sad thing is that many people think they can't file," says Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys and author of "Consumer Bankruptcy: The Complete Guide to Chapter 7 and Chapter 13 Personal Bankruptcy." The reality is that people who need bankruptcy can still get it, even if they have to pay a little more, he says.

Many who were planning to file did so before the rules changed in October 2005, so for several months the number of filers was very low, Sommer says. But the number is gradually rising and now stands about 50 to 60 percent of what it was this time two years ago. "And the numbers are going up every month," he says.

Costs of bankruptcy
If you're considering bankruptcy, you need to be realistic -- before you file -- about how it will affect the next few years of your life. Since bankruptcy shows up on your credit history (and stays there for at least seven years), it could be visible to everyone from potential employers and creditors to your insurance agent.

"It's a black mark," says Garkey, who worries that many bankruptcy attorneys don't put enough emphasis on the long-term effects.

"You will be denied credit or only be able to get it at much higher rates," she says.

It could also put you out of the running for certain jobs, depending on the company and your field of employment. And while some mortgage and auto lenders will look past a bankruptcy, many others will not.

Not only is credit more expensive, you will have a much smaller pool of lenders who are willing to work with you and you probably won't be able to borrow as much money as someone with clean credit.
Many times, people who have been through a Chapter 7 -- debt liquidation -- will get credit card offers not very long after the discharge, Garkey says. The reason: Creditors know that you can't file for bankruptcy again for at least 10 years. But the rates you'll be offered will be much higher than if you hadn't been through bankruptcy and the credit lines are likely to be much lower.

"Interestingly enough, more people report getting credit a few years after a Chapter 7 than after a Chapter 13," says Sommer. That's because after a Chapter 7, your debts are gone. With a Chapter 13 (reorganization), you're paying those debts (all or in part), over the next three to five years.

Should you file
If you're trying to make the decision of whether to file, there is one big question you want to ask yourself: Have you fixed the problem that caused the financial mess or is it still ongoing?

Unless you've stopped hemorrhaging money, or have a special circumstance (like pending foreclosure), it may not be time to file for bankruptcy. If you clear away or reorganize your current obligations but keep taking on debts the same way as before, you'll end up back where you started.

Bankruptcy is a better alternative for people who have gone through a financial crisis, come out the other side and -- except for the bills incurred in the interim -- solved the financial problems.

So what do you do if you're having financial trouble and are considering the bankruptcy option? First, look at your repayment options.

"I think people should seriously consider a repayment plan," Garkey says. One option: stopping in for a visit with a genuine, nonprofit financial counseling service, she says. In some cases, your local credit union will be able to refer you to a true consumer-centered service.

And always weigh a counselor's advice against what you know you and your family need. If they want you to sell your car and take the bus -- and you live an hour from the office -- that's not practical. But if they tell you to sell the SUV for something with lower monthly payments that gets better mileage, that's worth considering.

You might also be able to deal directly with the creditor, especially if the problem involves medical expenses. Sometimes the hospital will accept a settlement offer, says Garkey. "The worst thing to do is ignore it, because they may work with you," Garkey says.

If repayment is not an option (you either don't have the money for any type of repayment or the creditors aren't willing to work with you or a counseling service), then you probably want to talk to a bankruptcy attorney.

Consumer credit counseling exists "to help people avoid bankruptcy," says Gail Cunningham, vice president of business relations for the Consumer Credit Counseling Services of Greater Dallas. "But probably everyday in our offices we recommend bankruptcy" because it's the only option for some people.

"But it should not be your first step, it should be your last," she says.

So how do you know when you're ready to consider it? "When everything else you do is a Band-Aid," Cunningham says.

"People have financial hiccups," she says. But if the problem persists long-term, "that's why bankruptcy was designed."

The new bankruptcy
You may have heard: the rules for bankruptcy have changed.

"Probably the biggest change is that it's more complicated and expensive to file," says Sommer. Previously, a Chapter 7 (total liquidation) cost in the neighborhood of $500 to $1,500. Under the new system, a more realistic estimate would be $1,000 to "several thousand or more," he says.

For a Chapter 13 (debt reorganization), the cost had been in the range of $1,000 to $2,500, says Sommer. Now it's closer to $1,500 to $3,000.

But the people who need total liquidation bankruptcies are meeting the means tests and getting them, he says. "Lo and behold it's what we said all along: There are not a lot of people out there filing Chapter 7 who can pay their debts," says Sommer.

There are a few extra hurdles to clear. Previously, consumers could decide if they wanted a reorganization or liquidation. Now they must meet a means test. And that involves filling out a lot more paperwork, says Sommer.

"Median incomes vary state-by-state," says Sommer. "But in almost every state, almost all who file Chapter 7 are under the median income."

Consumers also have to get some education before and after filing. "That can be a problem if you have to file within 30 minutes to stop repossession," says Sommer. "But it's not a problem if you have a few days."

The new rules try to limit repeat bankruptcies by tightening up the timeline for proving that a second bankruptcy will succeed.

Why this is dramatic: Traditionally, two-thirds of Chapter 13 bankruptcies fail, says Sommer. "It's not easy for anyone to complete a Chapter 13," he says.

But now, if you file for bankruptcy within a year of your old bankruptcy being dismissed, you only get 30 days to show the court why this one will work, says Sommer.

Different types of bankruptcy at a glance:
• Chapter 7: Also known as liquidation, allows individuals or businesses to give up nonexempt assets and walk away from most debts. To qualify, debtors must pass the means test -- that is, their income must be less than their state's median income.
• Chapter 9: This section works like Chapter 11 and allows municipalities to reorganize debt.
• Chapter 11: Also known as reorganization, this type of bankruptcy is for individuals and, more commonly, businesses to restructure debt. Similar to Chapter 13, in that it allows the filer to draft a plan to repay some debt while retaining assets. Chapter 11 is much more complicated, and therefore expensive, making it financially feasible mainly for businesses and very wealthy individuals.
• Chapter 12: Allows family farmers and fishermen with regular income to reorganize debt. It works very much like Chapter 13, but usually stretches out over three years.
• Chapter 13: For individuals who need to restructure their debt load. Some creditors will be paid back in full with interest, others in full and the remainder will be repaid a percentage of the debt. Also used by creditors who do not qualify for Chapter 7 under the means test.

Avoiding bankruptcy
When it comes to your finances, ignorance is definitely not bliss. If you're in financial trouble, it's better to face it, even if that means thinking about the possibility of bankruptcy, and start investigating the options early. Sometimes that little bit of foresight can actually enable you to avoid bankruptcy.

"The difficulty so many consumers have is by the time they are taking action to fix their problem, the only option is bankruptcy," says Nick Jacobs, spokesman for the National Foundation for Credit Counseling, an umbrella group of local nonprofit credit counseling agencies.

So stop avoiding the mailbox, open those bills and take a realistic look at your finances.

And don't be afraid to take a closer look at the situations that got you into money trouble -- especially if you believe you've been taken advantage of financially.

"Man people who are going through bankruptcy are those who got into abusive home loans," says Sherry. And when sometimes the legal remedies don't work, they resort to bankruptcy. "Look at what consumer protection laws might be invoked." One place to find a consumer attorney who can help is the National Association of Consumer Advocates, which has more than 1,000 attorneys representing consumers victimized by fraudulent, abusive and predatory lending policies. Most important, find out where you are financially, get some good advice and create a financial plan for where you want to be. Take control of your finances and try to keep your sense of humor, too.

Says Garkey, "Even if you've had years of bad credit, it's never too late to start."

Dana Dratch is a freelance writer based in Atlanta.

-- Posted: July 1, 2006
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