Bankruptcy Questions

Once seen as the last resort of solving debt problems, it is not surprising that with the astonishing increase of debt in America, the number of declared bankruptcy increases as well. In declaring bankruptcy, debt laden consumers escape the wrath of and the debt owed to the creditors. However, over time the bankrupt consumer may pay more than what was originally owed. There are many unanswered bankruptcy questions out there that few consumers even consider.

Bankruptcy Questions Answered - Types

There are two bankruptcy forms available. Chapter 13 'Consolidation Bankruptcy' and Chapter 7 'Straight Bankruptcy'. Chapter 13 is rarely a good option for anybody, and is rarely used. As is common with both forms of bankruptcy, Chapter 13 goes onto your credit rating. This is not something that anybody wants, but in some cases, may be the only way out. The problem with this form is that most people who file, end up paying the majority of their debt within a three to five year period, and the mar of bankruptcy stays of your credit rating.

In filing Chapter 7 forms your possessions undergo a court supervised division between those which can be liquidated and those which are exempt. Possessions that are usually considered exempt include:

A percentage of equity on the primary residence
Primary vehicle
Certain personal belongings, such as clothing
Various other assets which differ from state to state

The majority of people who claim Chapter 7 bankruptcy tend to have only exempt property, meaning that creditors often get very little. However, this procedure occurs frequently enough that U.S. Congress is working on legislation making it more difficult to claim bankruptcy.

The Hidden Costs of Bankruptcy
While Bankruptcy may get you out of immediate hot water, the long term effects may cost you more than the amount of debt that you had. Bankruptcy goes on your credit history, and stays there for an average of 10 years. If within that time, you become financial stable enough to want to buy a home, or any other important purchase will wind up being far more expensive.

On average, people who have bankruptcy on his or her credit history, pay 2% higher interest rates on home mortgages. This may not seem like much, but over time this added 2% often ends up costing twice as much as the average debt load.

Here is an example. If you were to purchase a home at say $250,000 with a $25,000 down payment, with the remaining $225,000 mortgage paid monthly at a 7% interest rate your monthly payments should be $1530. If you have filed bankruptcy within the last 10 years, you stand to pay at least a 2% higher interest.

Suddenly, your payments work out to $1850 a month. Extrapolated over the time it takes to pay of your house, the additional interest as now cost about $115,000 more than you would pay! Approximately 25% higher than the average American debt load at the time of bankruptcy!

Many consumers are lured by the pressure of extreme debt to file bankruptcy, when there are still better options. And many of these people are advised to do so by financial advisors. However, we at the Debt Management Advisors think there is a better way - one that doesn't mar your credit rating and your conscience.

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