After filing for bankruptcy, it is virtually impossible for the debtor to obtain financing. A lender will never again work with someone whose credit report contains a bankruptcy. Secured financing - that is, vehicle loans or home mortgages; anything that could be repossessed or foreclosed - will offer the highest rates imaginable, whereas unsecured financing - credit cards and the like - will not even be available without prohibitive fees and deposits equal to the credit limit. Employers will increasingly require credit checks as a guarantee of dependability and honesty. There are even accounts of engagements falling apart after the bride-to-be discovered her fiance's bankruptcy! Certainly, it is all too common for the stressors associated with financial difficulties (especially the humiliating type caused by bankruptcy) to cause relationship issues that result in divorce.
With hindsight, it is evidently simple to determine what could have been done in almost all situations. Simply living within your means and, unless absolutely necessary, not borrowing from tomorrow's income to improve your life today should prevent the majority of problems. Credit cards should never be used for everyday expenses. Regular accumulation of domestic debts coupled with compounding interest may rapidly make debt burdens intolerable. Similarly, borrowing from one credit card to pay another or using credit to pay for essential utilities is a quick route to financial ruin.
Obviously, comprehending the causes of current debt crises will not stop collection agencies from calling. The most crucial step is recognizing that you have a problem with expenditures and financial management. Then, one must implement a plan to restore credit and minimize payments. Attempt to create a budget that allows for the repayment of all credit lines - highest interest rates paid first - by analyzing your income and determining what you can count on each month (excluding bonuses, overtime, or seasonal over-compensation) and what you or your family needs to maintain the bare minimum of support. A successful budget should allow for savings accounts and protection against future debt problems.
Still, we recognize that not every circumstance permits a swift reevaluation of a lifetime of inadequate planning. Also, those who have experienced genuine financial hardships, such as prolonged unemployment or unanticipated medical expenses, should not fault themselves for failing to take precautions. When the debt-to-income ratio approaches 45 percent (minimum monthly payments on revolving debt compared to gross monthly income), action is required. At a certain point, it becomes impossible for the average wage earner to regain financial stability without assistance from the government or a certified debt counselor. Direct communication with creditors may provide temporary relief. To meet minimums, many borrowers sell off their possessions and assets, regardless of how much they lose in real costs. After a certain point, however, the evils of compound interest and regulated minimum payments always necessitate a more comprehensive solution.
Insolvency is always a possibility for the genuinely destitute. Most people are aware that changes made to the bankruptcy program by legislation passed in 2005 have made the program significantly more perilous, but if your annual income is less than your state's median, Chapter 7 protection will eradicate the majority of your unsecured debts. Secured debts, which include anything that can be foreclosed upon or repossessed (such as mortgages and auto loans), are a distinct story. Although most states provide exemptions for cars and homes with a certain amount of equity and length of ownership, their bills will not alter, and their lenders will resist attempts to refinance after a bankruptcy filing. Other types of debt, including student loans, tax judgments, child support, and financial penalties resulting from criminal proceedings, are also exempt. Worse, Chapter 7 bankruptcy requires you to compile a complete list of all family possessions, including toys, hardware, home entertainment systems, and a grandmother's wedding ring, for possible seizure by government authorities so that they can be auctioned off to partially repay creditors.
Chapter 7 bankruptcy will promptly stop collection agency actions and prevent wage garnishment. The long-term effects on your credit score and the FICO credit score used by lenders to determine creditworthiness may last up to a decade; during this time, you or your family may be unable to obtain loans for vehicles, housing, education, or virtually anything; and this does allow courts to seize nearly all of a family's possessions for auction to repay creditors. Nonetheless, this does provide a much-needed respite for many debtors who would otherwise be incapable of even imagining repaying their creditors. The lengthy and costly (borrower-paid) debt management classes required by the courts prior to filing and again prior to ultimate discharge are yet another burden, but for the economically destitute, there may be no other option.
If the borrower earns a decent livelihood, however, the situation becomes more complicated. The legislation enacted in 2005 forced the majority of debtors into the Chapter 13 bankruptcy program, which, despite having the same credit consequences as Chapter 7 debt liquidation, aims to expedite the debtors' repayment schedule. Depending on the circumstances, affected balances may be reduced, but the majority of borrowers will still be required to submit to a court-mandated budget program and accept the same negative effects on their credit report and FICO scores as if they had participated in the debt liquidation program.
In recent years, as an increasing number of Americans have been unable to pay their accumulating debts, a variety of bankruptcy avoidance options have emerged. In recent years, the new availability of credit cards and the unstable economy have caused the bankruptcy rate to skyrocket, despite the fact that new laws make such a decision increasingly difficult and financially ruinous. Again, the consumer could attempt to negotiate with each creditor separately; however, without knowledge of the unique practices of each company and the inability to guarantee that each creditor will be treated equally, such negotiations rarely result in significant savings.
Despite the escalating advertisements promoting their services, consumer credit counseling primarily seeks to consolidate existing balances in a manner comparable to Chapter 13 bankruptcies, but with much less hope of balance reduction or government protection, and yet with similar effects on debtors' credit reports and FICO credit scores. Also, it is not a coincidence that the majority of consumer credit counseling companies receive fees from both consumers and credit card companies. While they are still intended to achieve a fair and equitable approach, many critics have questioned their actual master, as well as the benefits of a credit-ruining payment system that does not guarantee the elimination of debts that are dependent on lender payment.
The rapidly emerging debt settlement industry, on the other hand, negotiates significant reductions in overall balances from each creditor in exchange for a payment plan directly for the consumer. Obviously, borrowers must adhere to a regular payment schedule, and there would still be negative effects on credit reports (though significantly less severe than bankruptcy notations). Most importantly, debt settlement professionals are trained and certified to assist only the debtor. After signing with a debt settlement agency, all attempts to collect debts must be routed through the counselor in charge of negotiation, and, most helpfully, they know how to rebuild credit reports and FICO scores once the initial lenders have been repaid.
As demonstrated, it is always preferable to devise a money-management system that ensures every creditor will be paid back. Even if it takes several years and requires austerity or a second job, avoiding bankruptcy should always be every consumer's top priority. However, if there is truly no way for borrowers to escape debt, other options do exist, and it is the obligation of each borrower to investigate each alternative. There are times when professional assistance is required, and debtors must choose a debt-management plan that helps them avoid ever being in this position again.
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