About Going Bankrupt

Going bankrupt can lead to overwhelming feelings of failure

With credit card default, foreclosure and unemployment rates hitting record levels, more Americans are going bankrupt than ever. Although the social stigma has nearly disappeared, bankruptcy has negative consequences for personal finance. Lack of credit and higher interest rates are two likely outcomes, at least in the short run. Still, recovering from bankruptcy is possible, although there are no quick fixes or easy solutions for the debtor.

Types

There are four types of bankruptcy. Chapter 7 of the U.S. Bankruptcy Code allows consumers to shed most debts, while in a Chapter 11 filing, individuals and businesses can gain breathing room through a court-approved repayment plan. Chapter 12 is geared toward family farm owners. Chapter 13 requires a debtor to set aside future income for repaying creditors, which became more common after Congress overhauled the code in 2005.

The Process

Declaring bankruptcy starts with a filing in U.S. Bankruptcy Court, which means hiring an attorney and paying the relevant fees.Chapter 7 and Chapter 13 filing fees are $299 and $274, respectively. However, cash-strapped consumers can seek a waiver if their income is less than 150 percent of federal poverty guidelines, which can be found on the U.S. Bankruptcy Courts website, www.us.courts.gov.

Time Frame

For some observers, easy credit boomed during the 1970s, following a U.S. Supreme Court ruling that only required lenders to observe interest rate caps in states where they did business, not where their borrowers actually lived. Lenders quickly moved to states with high or nonexistent caps, allowing them to charge riskier borrowers more. This fueled a cycle of "subprime" lending that, during the 2000s, equaled 20 percent of the home mortgage market alone.

Significance

New subprime lending restrictions and bankruptcy law changes made credit harder to get

By 2003, lenders' profits evaporated as the economy withered and losses soared to 19 percent of the subprime market, according to msn.com. Regulators responded by shutting some lenders down and imposing tighter restrictions. Congress followed in 2005 by passing the Bankruptcy Reform Act, which restricted Chapter 7 filings. Consumers must undergo credit counseling, provide more documentation and pass a means test to avoid being placed into a Chapter 13 repayment plan.

Bouncing Back

Declaring bankruptcy takes easy credit off the table, at least in the short term

Bouncing back from bankruptcy is less formidable than it sounds, according to financial analyst Liz Pulliam Weston. Secured credit cards, which are backed up by bank deposits, are one major step that consumers can take in regaining credit, says Weston. Making timely payments on an installment account--such as a car loan--is another useful tool. The tradeoff, she adds, is having to pay double or even triple the going rate until credit is restored.

References

• American Bankruptcy Insitute: June 2010 Press Release
• Careoncredit.com: Bankruptcy -- The Last Resort
• MSN.com: Bounce Back Fast After Bankruptcy
• MSN.com: Why Going Broke Is A Fact Of Life In America

Resources

• Federal Reserve Bank Of Philadelphia: Did Bankruptcy Reform Contribute to the Mortgage Crisis?
• Federal Reserve Bank of New York Staff Reports: Seismic Effects Of Bankruptcy Reform
• StevePavlina.com: What I Learned From Going Bankrupt In My 20s
• U.S. Bankruptcy Courts