to the US Bankruptcy court, over 1.5 million bankruptcies were filed between
March 2009 and March 2010. That is a number that has steadily risen over the
last 5 years. The last decade was particularly brutal when it came to
bankruptcy, and it is likely you or someone you know filed. Between January 2000
and December 2009, 13,363,085 personal bankruptcy petitions were filed.
Bankruptcy has often been considered both a financial option of last resort and
a fresh start. Bankruptcy has sticky, long term financial affects that have a
direct impact on your financial health and well-being. This article will uncover
many of the factors that may put you at risk for bankruptcy and present ways of
protecting yourself against bankruptcy’s harmful effects.
History of bankruptcy.
The face and circumstances of bankruptcy has dramatically changed over hundreds
of years. During King Henry the VIII’s reign in England, people who were
bankrupt were considered criminals and could receive punishments ranging from
imprisonment to death. Today, it is still possible to be placed in jail or
remain there for debt. For example, you can be put in jail, or even kept there,
for not paying child-support, alimony, or release fines. However, one of the
most famous jailed debtors may have been Robert Morris.
Robert Morris was a signer of the Declaration of Independence and namesake of
Robert Morris University in Moon Township, Pennsylvania. Morris was a wealthy
businessman who made his money from importing and exporting goods. His personal
story is full of financial irony.
Morris’ success with investing and managing money served America well during the
Revolution. During the American Revolution Morris loaned George Washington
millions of dollars from his own savings in order to pay soldiers during the
war. Additionally, he was elected as Superintendent of Finance for 4 years in
order to help the country get its’ finances and credit in order.
However, even though Morris played several critical roles in managing the
country’s finances one of his own investments in real estate failed. This wiped
out his cash and put him in a position where he was unable to pay his debts. He
was put in debtor’s prison where he stayed for 3 years where he entertained
friends and fond visitors such as George Washington.
Robert Morris may have been the inspiration for America’s first official
bankruptcy law enacted in 1800; one that was also repealed in 1803. 2 more times
during the 1800’s bankruptcy laws were passed and then repealed. The Great
Depression brought new bankruptcy protections to consumers. This was the first
time debtors were offered “fresh starts”.
In 1979 new “chapters” were added. Chapter 11 for individuals and Chapter 13 for
businesses allowed “reorganization” of debts which could bring fewer long term
penalties. With more bankruptcy options available, the 80s and 90s saw record
numbers of bankruptcies filed. The Bankruptcy Abuse Prevention and Consumer
Protection Act became law in 2005. President Bush stated, “The new law will also
make it more difficult for serial filers to abuse the most generous bankruptcy
protections. Debtors seeking to erase all debts will now have to wait eight
years from their last bankruptcy before they can file again.”
So what makes you a potential bankruptcy?
Banks have a mostly unknown tool, called the bankruptcy risk score, which
provides them more in depth information about your chances of going broke. As of
today, banks are not required to share this report and information with
consumers. However, that doesn’t mean we can’t identify some of the factors that
make us a potential bankruptcy risk.
According to TotalBankruptcy.com, bankruptcy affects all demographics, however,
some groups are more susceptible to bankruptcy then others. For example, more
bankruptcies were filed by these groups: women, Caucasian, those with a job,
those who had graduated high school and had some college study, and those
between the ages of 35-44. Single women with children, in particular, compose an
unproportionate number of bankruptcies.
Outside of those personal identifiers other factors played a role in your
likelihood of filing for bankruptcy. For example, household instability,
divorce, large medical bills, job loss or underemployment, high student loan
payments, and high rent/mortgage payments predispose you to difficult financial
conditions that can lead to bankruptcy.
What would a bankruptcy mean to you?
Years on credit report
As mentioned before bankruptcy is sticky in the fact that it is a long term
addition to your credit record. Your credit report can show your bankruptcy
filing for up to 10 years, but many credit reporting agencies will remove it
after 7. In fact, if you look at your credit reports, you will often see there
is a removal date listed below the record of debt. During the time a bankruptcy
resides on your credit report you will be subject to more intense credit
discrimination, less favorable credit terms, and higher interest rates.
Not getting a job
In February 2011 a federal appeals court ruled that it is ok for an employer to
discriminate against a job seeker who has filed for bankruptcy. Note that it is
illegal to fire someone who is already employed and has filed bankruptcy. The
court noted that while there is a law stating the government may not
discriminate against applicants who have filed for bankruptcy, the law doesn't
not put the same requirements on private employers. Why would an employer care?
Whether their logic is right or wrong, some employers believe your bankruptcy is
an indicator of your personal responsibility.
In addition to the costs you will occur in the future because of a bankruptcy,
you must pay a $300.00 filing fee. Also, most attorneys will charge between
$1,000.00 to $2,000.00 to work on your behalf during the filing.
What is not covered in a bankruptcy?
Many people see bankruptcy as a fresh start, but they may not realize that
bankruptcy protection does not eliminate all types of debts. The following is
not an all-inclusive list, but rather an example, of some debts not discharged
through Chapter 7 bankruptcy. Consult a bankruptcy attorney for specifics
relevant to your own individual situation.
-Back taxes up to 3 years old
-Alimony owed or child support
-Money owed for property of money obtained under false pretenses
-Judgments against you as a result of you driving while intoxicated
-Claims from a previous bankruptcy where you were denied a discharge
-Consumer debts of more than $500.00 for luxury goods and services owed to a
single creditor within 40 days of being granted relief
-Cash advances up to $1,000.00 as extensions of open-end consumer credit
obtained by the debtor within 20 days of the relief
Suggestions on avoiding bankruptcy.
Unmanageable debt is like being overweight. You don’t wake up one morning to
discover you gained 20 pounds overnight. There are plenty of signs along the way
that trouble is coming. You may be late paying bills, your hours and pay were
cut at work, or you had an expensive hospital visit without insurance. There are
many warning signs that should warn you corrective action is needed right away.
Adjusting your lifestyle according to your circumstances is one way to work
through financially tough times. Cutting expenses, working overtime, or getting
a second job would be less stressful and damaging than going through a
bankruptcy. Don’t avoid making tough decisions. The longer you delay in dealing
with a financial challenge the more you put yourself at risk of far enough
behind that you can’t get ahead.
Perhaps the best advice is to get help long before you are forced to. Having
someone you trust take a look at your financial situation may lead to more ideas
on how to handle it. Ideally, you would have a professional look over your
situation and make recommendations that are better alternatives to bankruptcy.
After all, spending a year or two reorganizing your efforts will keep you in a
much stronger financial position then carrying the long term financial drain of