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Why should Bankruptcy be considered a "Last Resort" and not a "First Resort" option for debt relief?

Most people don't understand bankruptcy. They think they do as they hear the word all the time and they have a general idea what it does, or is supposed to do. However, until they speak to a bankruptcy specialist who can explain it, they really do not understand the following:

  1. This is a Federal proceeding in Federal Court where the US Court appoints a volunteer trustee to administer the bankruptcy filing and validate all the information in the petition to make sure that there is no misrepresentation or withholding of information or assets.


  2. This person's job (the trustee) is to find assets to sell to create money to pay creditors. He is not the bankrupt's friend.


  3. Once you file in Federal Court, you and your finances are under the direct control of a Federal Judge until the case is discharged.


  4. If any creditor objects and thinks that there is fraud or that a debt should not be discharged in bankruptcy, the creditor can bring a lawsuit inside the bankruptcy court to have that issue determined.


  5. Exemptions: Depending upon what State you file in, there are two sets of exemptions: your state's, or the Federal Government's. It is questionable which are more beneficial. Exemptions are things you get to keep automatically when you file. Not everything is exempt.


  6. In the past, a Chapter 7 Bankruptcy rules held that once the case was discharged, all the debts were declared dead, that is, if a suit were filed to collect, the bankruptcy gave the debtor an absolute defense. Thus, no one ever sued NOW, because of Bankruptcy REFORM, the proposed bankruptcy filer must be credit counseled and an attorney has to tell the court that the person actually in his opinion qualifies and, credit cards are no longer discharged but must be put into a "Plan" for repayment.


  7. Because of the necessary "Plan" mandates for credit cards, the fees for bankruptcy are much greater than they were prior to reform.


  8. Most people fail to complete the "Plan" for credit cards and they end up falling out of the bankruptcy. Why? Because there is no monitored structure. Because of the volume of cases, the trustees cannot monitor every case to be sure everyone complies. Why not the attorney? Because he would have to double his fees again if he and his office were to become your bankruptcy monitor to be sure you made every payment and complied with the plan.


  9. The stigma of a bankruptcy dictates that this public record will be on your credit report not for six years eight months, but for ten fully years.


  10. Yes, you can go out and buy something on credit after a bankruptcy is discharged, but when you do, you feel the real cost of a bankruptcy; the bank or lender charges you three or four times what others might pay in interest financing.


There are other options besides doing nothing and/or filing for bankruptcy that most consumers may not understand or even be aware of:

  1. Working directly with the creditors or banks. If you think you have the time, ability and skills and have available money to cut deals with and pay the settlements right then and there, this might be a good option. Be warned, however, that it can become extremely time consuming.


  2. Working out payment plans. Well, you are obligated from the beginning to make the payments. Why would a bank agree to let you make other or smaller payments without any benefit to the bank or creditor? Answer: you would have to have a legitimate hardship that would have to be validated with records, not one that was simply made up.


  3. CCC (Consumer Credit Counciling) is an option for debt consolidation. But today, most of the CCC companies work for the banks, the banks are not cutting interest rates, late fees or over the limit fees. In addition, while you may make a smaller payment, you extend, not shorten the life of the debt.


  4. Debt Negotiation... engaging an expert who can take your economic situation to the banks/creditors and make settlements while at the same time, putting the debtor on a savings plan to fund the settlements. Why would this work? Because with an experienced settlement company, a track record has been established and the banks and creditors trust such a company. Essentially, this is option A with someone else handling the headaches for you.


In summary, there are four options for a person in debt: do nothing; consumer credit counselors, debt settlement and then bankruptcy. Bankruptcy is the one that provides the most long term negativity in the mind of credit granters, the most opportunity for perpetrating a fraud, the greatest long range costs to future major purchases and the greatest chance of failure giving creditors another bite of the apple. In addition, legal fees are high and the rate of success or completion very low. Only one works at a fairly reasonable cost with the least amount of long term negativity and provides the debtor the easiest method for credit rehabilitation. What is it? Debt Settlement.

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