The Reality of Bankruptcy and What You Can Do About It

Proving that the nation’s economic trials are far from over, the National Bankruptcy Research Center reported that bankruptcy filings for 2010 to date are still about 12 percent higher than during the first eight months of last year.


Nationwide, the organization reported that there was one bankruptcy filing for every 110 households. The American Bankruptcy Institute adds that consumer bankruptcy filings are the highest they’ve been since Congress revised the bankruptcy law in 2005, adding that consumer filings remain on track to top 1.6 million filings in 2010.

There is no rule of thumb for when someone should file bankruptcy and others should tough it out. But consider this first. Federal law allows a credit reporting company to report most accurate negative information for seven years and bankruptcy information for 10 years. Any accurate information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.

And keep in mind that your credit report is accessed by more parties than lenders and landlords – insurers check your credit data and set your rates by what they find. Cellphone companies check your credit before they offer you a rate plan. But most important, employers check credit reports before they hire you – and a bankruptcy sometime in the last 10 years might communicate to a prospective employer that you’re not as responsible as they would like.

Here are some measures you should consider before filing either Chapter 13 (reorganization) or Chapter 7 (liquidation) bankruptcy:

If you own a home, can you refinance? Interest rates are still at all-time lows. If you’ve managed to be mostly on time with payments, you might qualify for a loan restructuring or refinance that can considerably cut your payments. Your financial planner might be able to give you advice on how to solicit this help.

Call your creditors: Again, get advice from a planner on what to say, but if you suspect you might be late with payments, do whatever is possible to see if you can lower your payments or possibly reach a settlement. Many creditors, including mortgage lenders, might settle for lower amounts on principal to make sure they get something.

Focus on high-rate debt first: For most people, this means the highest-rate credit card among all the credit cards they have. Set up a “knockdown list” of your debt from highest rate to the lowest and attempt to pay more than the minimum on balances.

If you’re not budgeting, you should be: Avoiding bankruptcy means accounting for every dollar you spend and finding the additional money necessary to get control of debt.

Either on paper or on the computer, write down every dollar you spend in the average week (and cut off credit card use during that week). At the end of that week, start marking out non-essential items just to see how much you could live without and then pledge to use any extras to pay off debt.

Go for free entertainment, take your lunch and eat at home: Yes, you’re in for a lifestyle change. Avoiding bankruptcy means taking extreme actions to cut luxury spending, and anything beyond paying immediate bills and eliminating debt should be considered extra.

Park the car and do vehicle and home repairs yourself: Assuming you can do these things competently and safely, take over absolutely necessary repairs on your home or your car. If they don’t need the immediate fix to operate, put it off. And learn to ignore cosmetic issues on your property – at least for now.

Buy essentials and focus on buying used instead of new: Internet auction sites supply an extraordinary number of new and near-new products that can save money if you need to make an essential purchase for yourself or your family. Buy used or heavily discounted and direct that money toward your debt.

Pay cash: When you spend money, make sure it’s cash or debit. Don’t cancel your credit cards – it will damage your credit score – but put them far out of reach and avoid using them until you get your situation under control. And once you have saved your credit, keep the credit cards where you left them.

October 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.