Just the thought of declaring bankruptcy paints harsh, even repulsive, pictures in our minds. But for a huge number of people currently struggling with a sinking economy, it could be their only recourse.
When do you declare bankruptcy? How far down should you sink before you raise your hands to call it quits and request the courts for a clean slate to start over?
Why some people won't declare bankruptcy
In the 12 months that ended last year in September, more than a million Americans filed for personal bankruptcy, an overwhelming 30 % increase from the 2007 figures, the Administrative Office of the U.S. Courts revealed. According to Justin Harelik, a lawyer with Price Law Group in Los Angeles, there are thousands more who "are unofficially bankrupt" but are reluctant to file.
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"I'm aware that the word itself carries so much shame and stigma. But it's right for so many people." Mr. Harelik said.
Understandably so, to be marked as a failure and the fear of a washed-up credit are hindrances to filing bankruptcy. However, those feelings can stop a lot of people from availing of financial benefits extended by bankruptcy. These may allow them to wipe off their debts without losing personal assets like retirement accounts and even their home and car. Sadly, filing is delayed for too long until nearly all of their assets are gone.
"A lot of attorneys say they wish people would come earlier, before they emptied their retirement accounts or lost their car to repossession," revealed Katherine M. Porter, a researcher with the Consumer Bankruptcy Project and Associate Professor at the University of Iowa Law School.
Because of the intricacies of bankruptcy, many individuals are suspicious of filing and don't have a clue about their choices and the result of those choices.
Common misconceptions
A common misconception is that declaring bankruptcy will destroy your credit. If you are considering bankruptcy, chances are your credit is shot to shreds anyway. "You may not end up that much worse off," says Ms. Porter. Dealing with your debts could usually get your credit in better shape.
Another misconception is that you should hit rock bottom before filing. You can't lose all your assets in a bankruptcy as some assets which you will need to start over are protected. Delaying until all your resources are wiped out nullifies one of the purposes of bankruptcy - "to help people rebuild their lives on a sounder footing," said Harvard Law School professor Elizabeth Warren, a lead researcher on the Consumer Bankruptcy Project.
Start over and move forward
It was the wish to start over with a clean slate and move forward that drove Claire Morgan to file for bankruptcy last December. Aside from an outstanding $12,000 in student loans, Ms. Morgan is struggling with $40,000 in credit card debt - an amount higher than her $35,000 annual income.
Ms. Morgan admitted, "Bankruptcy was the last thing I wanted. But it's better to be able to say 'I'm in the clear' than to be still struggling in five years to pay $40,000 in debt on a $35,000 salary."
Most bankruptcy lawyers provide free initial consultation, said Ms. Porter. Visit the website of the National Association of Consumer Bankruptcy Attorneys to help you search for a lawyer in your area.
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