COULD IT BE THAT IN 10 SHORT YEARS, THE ULTIMATE financial taboo has become just another trend? One million people declared bankruptcy last year, twice the number of a decade earlier, and that figure is not inflated by business filings. Of the 300,000 bankruptcy petitions filed in U.S. courts during the 1996 fiscal third quarter, all but 14,000 were personal. Experts in the field say bankruptcy filings are growing so fast, it's almost as if the average debtor now sees bankruptcy as a financial panacea -- a carte blanche debt-free card.
Yet, for all the widespread publicity and the dozens of do-it-yourself manuals, misconceptions about personal bankruptcy still cloud this very serious matter. For instance, Keith, a 29-year-old computer operator from New York City, thought it was his only salvation three years ago when he graduated from college and found a tighter job market than he expected. Out of work and strapped with $12,000 in credit card debt and student loans, he decided to go ahead and start anew by filing for Chapter 7 bankruptcy protection. "Since I wanted to wipe out the entire debt at that point, I was convinced an extreme solution would be best," he recalls.
Finding a lawyer in the Yellow Pages was easy, and legal fees amounted to no more than $700. "I'd already made the decision to file after reading law books and talking to other folks who had done it," says Keith. So why is he haunted by hindsight even though he's squarely on his feet? For starters, he's barred from any line of credit for another four years. When he and his wife went looking for their new home two years ago, Keith knew his name couldn't appear on the mortgage, even though he can well afford the couple's monthly payment on his own. However, what really hurt was the realization that with his sterling credit record prior to the bankruptcy proceedings -- Keith never once missed a bill payment -- he might have had the opportunity to cut a payment deal with his creditors.
He now regrets not having looked at other options, especially since he found a new job just a month after filing. Looking back, he says his situation was not as urgent as he had thought: He wasn't behind on any payments and now realizes that his $12,000 credit card debt pales in comparison with the burden carried by many.
Keith's story underscores the importance of knowing what bankruptcy is and how to file properly. What's more, since African American consumers face historical barriers to fair lending, adding bankruptcy to our list of credit concerns can be the stroke that blocks a business loan, credit line or mortgage.
Unfortunately, an uncertain job market and the weight of carrying high-interest credit cards, mortgages and other lines of credit have led many people into dire circumstances. A recent American Bankers Association telephone survey found that 16% of respondents had been late with credit card payments in the last year. Issuer's less stringent lending policies have no doubt helped contribute to this trend. Still, experts say that many people, now more accustomed to the notion of bankruptcy, think it's an easy way out. For one thing, they may have seen people they know come through it and rebuild their credit without losing their house or car.
"Knowing someone who has filed in the past puts people at ease about filing themselves," says Charles A. Grundy Jr., a consumer bankruptcy attorney in Lexington, Kentucky. In fact, Grundy says that the attitude toward filing for bankruptcy has become so relaxed that he is beginning to see repeat filers. "These people don't fear bankruptcy at all."
Kim, a New Jersey dialysis nurse, didn't think twice until the day of her bankruptcy hearing in 1985. "I heard case in which people tens of thousands of dollars," she says. "I thought I could pay my debts and avoid filing, considering the $700 or $800 I was paying the lawyer." In 1995, a full 10 years after filing, Kim and her new husband were turned down for a mortgage; they swallowed hard when the broker cited her bankruptcy as the reason. Finding a lender became a nightmare that took the couple an extra year. "We had to write about eight involved letters to mortgage officers and underwriters just to explain what had happened, even though the bankruptcy should have been removed from my record. "It was really demeaning," she adds, "because we had to expose everything." And the problems didn't end there: Kim recently found out that a major credit issuer has refused to give her a card because of her past bankruptcy.
The following is a list of 10 important things to consider before filing bankruptcy. Pay careful attention to these points to avoid filing incorrectly or unnecessarily.
1. CHOOSING A CLEAN SLATE
OR STAGGERED PAYMENTS
One of the first things any book or lawyer will likely tell you is that there are two consumer bankruptcy choices at your disposal. The difference boils down to just what kind of debt you'll continue to carry and whether or not you'll work to pay off what you owe. Under Chapter -- bankruptcy, you can effectively wipe away any debt you have and start anew, but at the cost of selling off some of your assets -- your car, home, etc. The alternative, Chapter 13 bankruptcy, essentially allows you to devise a payment schedule for outstanding debt, one that best fits your budget. However, there's one thing that's the same for both filings: your credit report will carry a negative entry reporting your bankruptcy for 10 years.
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