You are drowning in credit card debt. Bill collectors are harassing you day and night. You just can't take it any more.
Should you consider filing for bankruptcy and starting fresh with a clean slate?
This is the issue confronting many Americans. According to the Consumer Federation of America, the size of the problem is staggering. There are over one billion cards in circulation. Most people pay only a portion of their credit card debt monthly, leaving an average balance of more than $10,000.
However, filing for bankruptcy is no panacea.
The new bankruptcy law that was passed into law in April 2005 makes it more difficult for consumers to discharge credit card debt. The new law requires debtors to pass a "means test" in order to qualify for discharge of debt or for payment of their obligations from existing assets. If a debtor does not pass the means test, they may still be permitted to file for bankruptcy, but they will be required to pay some portion of their obligations over a three-to-five year period.
The new law also requires mandatory credit counseling and budget analysis and attendance at a financial management course.
Under some circumstances, your home may not be exempt from creditors, even if your state provides for a homestead exemption.
Even if you qualify under the new bankruptcy law, it still may not be in your best interest to file.
The costs of bankruptcy can be significant. These include attorney's fees, fees for mandatory credit counseling, filing fees imposed by the Court, and other administrative fees and expenses depending upon the nature of your proceeding.
While bankruptcy will not destroy your credit, it will be far more difficult for you to get loans for big ticket purchases like a home or a car. The fact that you filed for bankruptcy will stay on your credit report for ten years.
You should consider bankruptcy as a last resort. Look at your other options, including negotiating with creditors and borrowing money from other sources. These alternatives may be preferable to turning your financial life over to the Court system and hoping that the result satisfies your goals.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).