Bankruptcy is a huge financial blow. It can be embarrassing, as well as hurt a person’s self-esteem and confidence.
And in these tough times, more and more Americans are filing for personal bankruptcy. Many say they have no choice.
Experts say bankruptcy should be a last resort, but if you are buried in debt and cannot get out, they say it may be your best option.
As the nation struggles through this recession, consumer bankruptcies are on the rise and the reasons can include losing jobs or having a cutback on hours at work, major medical bills, or being deep in credit card debt.
In our series, “Is Bankruptcy the Answer?” we take a look at the growing problem and see how people can determine whether bankruptcy is the answer.
In recent months, business has been on a steady incline for bankruptcy attorneys like Deb Voltz-Miller.
“In this area, a lot of people that are filing for bankruptcy are doing it as a result of losing their jobs,” says Voltz-Miller.
Voltz-Miller says she is seeing more middle and upper-income people filing; many who never had financial problems in the past.
“We're seeing more people that want to repay their debt, but through circumstances beyond their control, they're just not able to,” adds Voltz-Miller. “A lot of people live paycheck to paycheck and when things go up, they aren't prepared for that additional expense.”
The American Bankruptcy Institute expects 2009 to have the highest number of bankruptcies since stricter laws went into effect in 2005. It's now more expensive and time-consuming to file.
According to the U.S. Bankruptcy Courts, in the 2008 fiscal year (October 1, 2007 to September 30, 2008) there were 1,042,993 bankruptcies filed. That's up more than 30% compared to the 800,000-plus filings in the 2007 fiscal year.
Compared to the other 50 states, Indiana and Michigan rank among the states with the highest number of bankruptcies. Tennessee tops the list for most bankruptcies in 2008. Indiana is in fifth, Michigan ranks six, and Kentucky is at seven. And at the other end, Wyoming comes in at number 50.
Joe Bradley knows Indiana's numbers all too well. He's a Chapter 7 Trustee for the U.S. Bankruptcy Court in South Bend. Bradley works with debtors to recover assets to the benefit of creditors.
“The vast majority of them would like to be anywhere else other than the bankruptcy court, they consider it, most of them consider it, not a financial failure, but a personal failure, some consider it a moral failure,” says Bradley. “This is a difficult decision for nearly everyone who goes through it.”
So is bankruptcy the answer?
“If your monthly income is far less than the debt you should be paying out monthly, then you have a crisis where you may be thinking of bankruptcy,” says Mary Jo Anderson.
Anderson is an attorney with the Volunteer Lawyer Network. They help low income families deal with debt related issues in several northern Indiana counties.
Before bankruptcy, she advises trying to work out a payment plan with your creditors.
If you decide to file, you must take a court-approved credit counseling class.
The debtor must also pass a means test to determine whether it's best to liquidate debt in a Chapter 7 or do a re-payment plan through Chapter 13.
Debtors must also take a debt management class and pay a filing fee and attorney fees (if they hire one).
While bankruptcy allows folks to wipe out debt and get a "fresh start,” it also means the bankruptcy stays on a person's credit record for the next seven to ten years.
But Bradley says the bankruptcy laws are there for a reason.
“It probably saves marriages, saves medical bills, saves suicides, because at least these people are getting out from those constant pressures, get back on their feet, not going to spend the rest of their life paying old debt, going to be able to take care of themselves and their family going forward,” says Bradley.
Filing for a personal bankruptcy will cost you around $299. That doesn't include the attorney fees, which range between $1000-$2000, sometimes more. Some bankruptcy attorneys will offer clients a free consultation.
If you file, there is still some debt you can never get out of, like most student loans, child support, alimony, and taxes.
Coming up Wednesday night on NewsCenter 16 at 6, we'll hear from a young woman who just started going through the bankruptcy process.
We'll also hear from her bankruptcy attorney, who has tips on what you should not do if filing for bankruptcy. One of those tips: experts say don’t dig into your retirement or 401k plans because most of these accounts are protected in a bankruptcy.
Click here for a list of bankruptcy resources.