Sometimes Less is Just Less
According to the National Bankruptcy Research Center, Chapter 7 bankruptcies, which allow for the legal removal or forgiveness of most unsecured debt obligations (exceptions include government-backed student loans, delinquent taxes, fines, alimony, and child support), rose 42% in November 2009 relative to 2008.
In 2005, the government made the bankruptcy laws more stringent. The revised law included an income means test, forc people with higher incomes to file a Chapter 13 bankruptcy which involves a debt repayment plan. Consequently there was a spike in the volume of Chapter 7 bankruptcy filings at the end of that year. The change in the filing requirements, however, did not put a damper on the number of filings this year.
Because of the housing crash and the unemployment explosion, many couples and individuals from a variety of educational and professional backgrounds have been seeking bankruptcy protection as the only means to deal with their debt. This past year, people haven't been trying to find an easy way out of a massive spending spree where they bought designer shoes and European sports cars.
Instead the debt has predominantly come from credit cards that were used by the down-sized or unemployed as a means of survival when their income disappeared, by college students who couldn't find loans or part-time jobs so they relied on credit cards to pay basic living expenses, by small business owners who had to pay suppliers while there revenue dried up, and by people with no emergency savings faced with unexpected medical bills. On top of all this, last year the housing market shed billions in value as demand came to a screeching halt, giving homeowners a double-whammy.
Bankruptcy doesn't have the stigma that it used to, but it still has the ability to trash your credit report. However, the bankruptcy laws were created for a reason: to give you a solution where there isn't another one. It gives you the opportunity to start fresh, at least where part of your unsecured debt is concerned. In fact, studies have shown that most bankruptcies are the result of very high medical debt. Yes, filing for bankruptcy can damage a credit report but if you have been struggling to pay or are unable to pay your debts over an extended period, your credit report will be suffering anyway.
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