Over the past couple of years bankruptcies have increased dramatically as a result of the economic downturn. Many of us have enjoyed the cheap credit thrust on us from credit card companies and retail stores but as the financial climate has changed we find that we can no longer keep our heads above water financially.
Is often thought the bankruptcy should only be filed as an absolute last resort. In some respects this is true, but sometimes one can spend a great deal of money, often through loans secured on our property, to delay claiming bankruptcy as long as possible, which is not a sensible thing to do.
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The problem here is the fundamental difference between secured debt, (debt that takes a portion of our property as collateral), and non-secured debt, otherwise known as consumer debt, for example credit card debt, which is given with no security requirement.
Over 90% of bankruptcy petitions in the US are petitions for chapter 7 bankruptcy, or straight bankruptcy as it is often called. This is because under chapter 7 the bankruptcy court trustee sells the debtors possessions and distributes the proceeds amongst the debtors creditors. Any shortfall in repayment to the creditors is written off and the debtor has no further liability for any outstanding debt, giving the debtor what is in effect a clean financial start.
At least that's what most people think.
Because people think that they are going to lose everything in a chapter 7 bankruptcy, and they don't like the idea of a chapter 13 bankruptcy where they pay off what they can afford over a 3 to 5 year period, they continue to put off claiming bankruptcy whilst often borrowing heavily to keep them financially afloat.
Now it may well be that if someone is simply going through a rough financial patch and simply needs an injection of cash to maintain them for a defined period after which they know they will be in a position to cover the debt and restore their finances, then borrowing money for the short-term may well be fine. For example, if someone loses their job borrowing money may be fine to tide them over as long as they can get a new job.
However, if by borrowing money one is simply staving bankruptcy off, one is simply throwing good money after bad.
Let's go back to chapter 7 bankruptcy, the preferred type of bankruptcy for most people, and what I was saying about secured and unsecured debt.
The fact of the matter is a chapter 7 bankruptcy is primarily for those whose main type of debt is non-secured, consumer debt. This is important because if like many people someone is struggling to pay just the interest on their credit card bills and the only avenue open to them is to take out some form of secured borrowing, such as a home equity loan, then that is the time to file for chapter 7 bankruptcy.
The point here is that credit card debt (i.e. non-secured debt) can be discharged under a chapter 7 bankruptcy. A home loan (i.e. a secured debt) cannot. Therefore one should claim bankruptcy in this case when one can no longer afford to pay one's credit card bills. If that person delays claiming bankruptcy, takes out a home equity loan, then runs up further credit card debt that they can no longer afford and then claim bankruptcy, they can have the credit card debt discharged under a chapter 7 bankruptcy but will still have to pay the Home Equity loan. They are therefore then paying for a loan and have nothing to show for it.
The real point I'm making it, is that when finances get seriously difficult, one should always consult a bankruptcy lawyer before filing for bankruptcy. A bankruptcy lawyer can give specialist advice that can potentially save debtors thousands of dollars.
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