Who WANTS To File Bankruptcy?

05 Jul Who WANTS To File Bankruptcy?

After filing thousands of bankruptcy petitions over the past 17 years, I have found that almost nobody WANTS to file bankruptcy. Although there is a popular myth that people who file bankruptcy see it as an easy way out of their financial problems, the reality is that most people do everything they can to AVOID filing bankruptcy.

I wish more people looked into bankruptcy as an option BEFORE they came to see me. Often they have: borrowed from friends or relatives to try to pay down their debt; borrowed from their retirement; cashed in the cash value of their life insurance; taken out a home equity loan; agreed with some of their creditors to pay a percentage of the debt in full; contracted with one of the “Debt Adjustment” or “Credit Counseling” organizations to pay a monthly payment with the expectation that they will make arrangements with the creditors.

All of these actions can be BIG MISTAKES. Rarely do these actions take care of the problem. Usually the best they do is to postpone the inevitable. The loans from relatives often result in ruining the relationship. Taking money from retirement accounts or life insurance depletes protected assets and makes them unavailable when you really need them. Using the equity in your home also depletes a protected asset, can greatly increase monthly expenses, and often leads to the loss of the property up the road. Paying a portion of some debts in full satisfaction depletes the assets you use to make the payments, leaves other debts unpaid, hurts your credit score, and often results in serious tax consequences. (They don’t tell you but they will send a 1099-forgiveness of debt form to the IRS, and you may have to pay income taxes on the excused debt). Possibly the biggest mistake is to contract with a company that tells you that if you just send them a sum of money each month, they will stop all collection activity, make deals with your creditors, and allow you to avoid bankruptcy. The truth is that many of these organizations are being investigated/closed by state attorney general offices, that they take the first several months of your payments to cover their “fees”, that your credit quickly goes down the tubes, and in the vast majority of situations, you eventually have to file bankruptcy after you have sent them thousands of dollars!

Seeking early information and advice from an attorney who is well versed in how the bankruptcy laws can affect you, is the smartest, most cost effective first step in dealing with your debt.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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