Is Bankruptcy the Right Course for You to Take?

Filing for bankruptcy does more than ruin a consumer’s credit rating. A bankruptcy on a credit report can limit employment prospects, make it hard to find an apartment and make a variety of transactions--from getting insurance coverage to buying a home--more difficult and costly.

Still, attorneys and consumer advocates say people who are heading for bankruptcy anyway should consider filing before reforms make the process more complicated, time-consuming and expensive.

Certain debts, such as student loans and back taxes, usually can’t be wiped out in Bankruptcy Court.

Bankruptcy also may not be the best solution for consumers who can negotiate reasonable payment plans with their creditors.

Debt counseling groups such as Consumer Credit Counseling Service can help consumers reduce their interest rates and payments with many creditors. Such negotiated deals can harm the consumer’s credit rating, although typically not as much as a bankruptcy would.

Bankruptcy may be a better option for those who have lost their job, incurred large uninsured medical bills, gone through a divorce or suffered some other economic setback and have little hope of repaying what they owe.

Most consumers who file for bankruptcy opt for Chapter 7 liquidation, which wipes out most of their unsecured debts--obligations such as credit cards that aren’t backed by a home, car or other property.

The consumer must give up certain assets--stocks, bonds, cash, jewelry, furs and large amounts of equity in a home or car--and the proceeds are used to pay creditors.

The reforms, which would take effect six months after the bill is signed by President Bush, would impose an income-based formula or “means test” on anyone filing for Chapter 7 to determine whether they are able to repay any of their debts.

This requirement would greatly increase the paperwork and time needed to file for bankruptcy. The cases of those who fail the means test would be transferred to Chapter 13 bankruptcy, which requires a repayment plan.

Some people choose Chapter 13 bankruptcy because they are allowed to retain equity in their homes or cars in exchange for promising to repay some of their debts. The new bill would make Chapter 13 less attractive to some consumers because it would be harder to protect a vehicle from creditors.

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Downward Trend

California bankruptcy filings have fallen 40% from a recent peak in the second quarter of 1998. Consumer filings make up 97% of bankruptcy petitions statewide and nationally.

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4th quarter 2000: 33,612

Source: American Bankruptcy Institute