Wednesday, May 27, 1998

Bankruptcy: A Bad Option For Bad Debt
By George Runkle ([email protected])

Let's say you are up to your neck in debt. You have creditors calling you at home and at work. You can't even make your minimum payments on your credit cards, and the only expense you can cut down on now is food. What do you do? Is bankruptcy an option? At first look, it seems quite enticing. Wipe all the debts and start up again fresh. Why not?

When I was little, my father told me that when you go bankrupt they sell everything you own. He told me that they sell your furniture, car, house, clothes, and anything else they can find. Your debts are canceled, but you are penniless and on the street. This isn't true now, and may never have been. Chapter 7 bankruptcy, which is what most people encounter, allows you to keep your home, car, personal effects, and tools you need to do your job. For example, if you are a plumber, your pipe wrenches, thread cutters, and other tools won't be seized and sold. All of your debts except taxes, criminal judgments, and certain civil judgments are cancelled.

It sounds too good to be true, and like most things on that line, it is too good to be true. I know that I will get one or two e-mails from people who have gone bankrupt, and they will insist it was no problem. They will tell me about all the credit they have gotten since, and how it didn't affect their lives one bit. You see with bankruptcy, the less you have (personal effects, decent job, and personal sense of responsibility), the less you have to lose.

When you go bankrupt, any luxury items like boats, artwork, heirlooms, and other non-essentials can be seized. The court will investigate whether you have been giving away your assets to relatives, and will attempt to seize anything you've disposed of in that manner. If you are facing an eviction, it can be slowed down, but ultimately it can proceed. You can still lose your car and house if you don't take up payments on them again. Also, the court will look for any attempt at fraud. If it appears you ran up debts when you knew you were facing bankruptcy, these debts may not be discharged. For evidence of this, they will look to see if you contacted creditors, and assume you knew at that point you were entering bankruptcy. Any debts from this point on could remain with you.

I've read a number of posts from people who are trying to help out irresponsible relatives and friends. I have to give those of you doing that a warning. Guess what will happen to any "consolidation loans" you cosign if that person enters bankruptcy? They are now your consolidation loans. Not a pleasant thought.

Ok, now you've gone through bankruptcy, what happens now? You can only go into bankruptcy every seven years (and some people do). I said in an earlier Fribble that getting credit after this is hard. Well, not really; I didn't realize how many companies out there are more than willing to give out credit at 22% or so. If you borrowed $15,000 to buy a used car with that type of interest for five years, your payments would be $414 a month. For those with more sterling credit borrowing at 8%, they will pay $304 a month. Obviously, you will be paying dearly for that bankruptcy in interest charges in the next few years. Again, if you always had rotten credit, and don't care about how much you spend on interest, and never will have good credit, this won't matter to you.

What about jobs? By law, an employer can't discriminate against you for bankruptcy. However, future employers do check credit reports. Do you think a potential employer will hire a person that has had a bankruptcy into a job where they could potentially steal or embezzle? Also, if you work for the government, law enforcement, or a defense contractor, how will this affect your security clearance? If you never have worked any job with responsibilities, and never intend to, bankruptcy probably won't hurt you here either. Otherwise, it may or may not depending on how thorough the future employer checks you out. It is somewhat of a gamble.

Probably the worst effect is in getting a place to live. A home loan, while secured, represents a significant investment by the lender. Getting a house loan is often difficult enough for those with good credit. Unless you are lucky enough to find a distressed property that the owner is willing to finance, someone co-signs for you, or you somehow come into a large amount of money for a down payment, buying a house will be difficult. Since many landlords do credit checks (evictions are expensive), finding a quality apartment will be difficult, too. If you don't care about where you live, the bankruptcy won't affect you that much there either.

Summarizing everything, bankruptcy is almost like getting in trouble with the law. For those of us who wish to have options in our life, getting a criminal record is not a good thing, since it closes doors. Having a bankruptcy is much the same thing in that it closes doors and takes away options. If you never care to have a future, or any options in life, it matters little. If you wish to accomplish something, however, and do something more with your life than you already have, bankruptcy could become a greater burden than your debts were.

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