The disadvantage of declaring that you are broke is that it smears your financial reputation in a very bad way. This affects your credit score and credit history for the next 7 to 10 years. When you have a bad credit standing, you will find it hard to get financial assistance in the future. It’s either you will not be approved for a loan or you will be given very high interest rates that could end up crippling you again.
On the other side of things, there is an advantage to bankruptcy because all your debts are forgiven if you qualify for Chapter 7. If you declare that your funds are depleted, you are viewed upon as someone without the financial means to pay for all your loans – that includes your credit cards, car loans, mortgages and other obligations. All present debts will be wiped clean – if you qualify for it.
The New Bankruptcy Law
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed and it provided strict rules for people filing for bankruptcy. Someone who wishes to file one will undergo intense scrutiny so it is certain that they are not merely escaping their financial obligations.
It was believed that people used this law to wipe out their debts and thus abusing their spending behavior. With this change, people have to undergo strict means tests and follow certain rules before their financial obligations can be wiped clean.
The goal of this law is leaning towards helping people settle their loans. Provisions of the law included incentives that will help make payments manageable like lower interest rates. Credit card debts and medical bills can be cancelled entirely if the individual is of the lower income class.
For the higher income individuals and businesses, they are required to file bankruptcy under Chapter 13 wherein they are given a more lenient plan that will enable them to pay off at least a portion of their original loan – if not all of it. The length of the payment terms can grow for up to five years thus allowing smaller monthly payment obligations.
Other details of the new law also limited the number of times a person or business can declare themselves bankrupt – which is once every two years. Also, car loans purchased within the first 30 months after the filing will obligate the debtor to pay for it in full.
Not everything about this law is about the consumers though. Credit card companies are also mandated to raise their minimum monthly payments so the cardholders are forced to pay more and thus shorten the time needed to finish off the amount that they owe. This will mean lower interest payments – which will lower the profits from the debt. But at least, it will ensure that consumers are given the chance to pay their dues without suffering from high interests.
Filing for Credit Card Bankruptcy
Before you can file for personal bankruptcy, you need to pay for 6 months of credit counseling first – as your proof that you tried to revive your financial standing. The idea is to discourage walking away from your debts. The counselor will then advise if the person should either take the next step to declare they are broke or come up with a plan to pay them off slowly and steadily.
When advised to file that you are indeed bankrupt, you are still mandated by the law to enroll in financial management courses that will teach you how to avoid being in the same situation again.
Since there seems to be a lot more work involved in declaring that you are unable to pay your debts, legal fees connected to this are rising steadily. This is another disadvantage that is meant to discourage people who merely want to escape their debt obligations.
We highly advise that you consult an expert before filing for credit card bankruptcy. We’d like to offer our services to help you with that. Give us a call and we can sort out your credit woes before you can consider declaring yourself broke once and for all.