Bankruptcy has always been a way for consumers to dip out of their obligations with creditors. It used to be so that anyone could file for a Chapter 7 when way over their head in debt and be free of worry. When filing for a Chapter 7, your assets are dissolved and given to your creditors as compensation, then whatever other debts you have became null and void. So if you had a student loan, mortgage or credit card debt, they would easily disappear, giving you a new beginning. But since 2005, this has since changed thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act.
This means that the law has to work harder to ensure that consumers aren’t abusing their rights to file for bankruptcy, by making is very inconvenient. The goal is to prevent consumers from running up their debts and using bankruptcy as a shield from having to pay them. There are new requirements for consumers who’d wish to file for bankruptcy, such as mandatory credit counseling, audits, “means tests”, which make sure that you aren’t hiding wealth, high filing fees and a ban that prevents consumers from filing for bankruptcy again within 8 years. If these terms are met, then the consumer will have to file for a Chapter 13, which means you won’t get away squeaky clean from your debts. This will require you to set up a 5-year payment plan with your creditors .
Since these new rules have taken place, there has been a slight cut back in bankruptcy filings by consumers. To give you an idea, between 2001 and 2004, there was about 1.5 million people in the U.S. filing for bankruptcy annually. But since the economic disaster we’re facing, the numbers of filings have been increasing again. Here is a visual of how things were looking during 2010:
What Happens After Bankruptcy?
Once you have filed for bankruptcy, you will have to endure the long process of rebuilding your bad credit. You don’t really have many choices, except for secured credit cards, which is a good option after filing a Chapter or 13. With the secured credit card, you will be required to put upfront collateral, usually around $300-1000, allowing you a credit line that is equal to your collateral. The card issuer holds on to your money until you’re ready to close your account with them. You are responsible for paying your bill monthly, or you’ll face interest rates like with a regular credit card (putting you back in debt).
If getting a secured credit card sounds good to you, we recommend that you consult with your local credit union or bank, since they are more likely to give you more affordable fees and rates than those you’ll find on the Web (take a look at our wall of shame for an idea of what to stay away from). Top banks like Wells Fargo and Citibank allow you to trade in your secured credit card for an unsecured credit card after 1-1.5 years of doing well. The popularity of prepaid debit cards have surged, but we don’t recommend them for your credit building. But if worse comes to worst, you can opt for them to help get you out of your bad credit pit.
If you’re trying to stay out of bankruptcy, it’s important to have good financial habits. This includes bargain shopping. You can find deals from Groupon to shop at places like American Eagle, JCPenney and Nordstrom.
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