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BankruptcyWhy Avoiding Bankruptcy Is Necessary. By Debt Consolidation Advisors.

About Bankruptcy

Bankruptcy is effectively the end of the line for somebody who is literally drowning in debts. It is the ultimate consumer trump card. Declaring bankruptcy forces all commercial creditors to cease and desist on any attempts to collect the debts owed them. It also ensures there will be no wage garnishment, and generally wipes out debts, depending on which form of bankruptcy declared.

The unfortunate truth is that for some people, bankruptcy is the only way out. If you owe $75,000 in credit card debts, for example, and it's unlikely you'll ever earn much more than $1,000 per month, it may be your only way out. In a scenario like this, the sooner you face the proverbial music and declare, the sooner you will have a fresh start.

Judging by the record numbers of bankruptcies in America, a statistic that grows dramatically every year, this is a very popular option. In fact, this is such a popular option that Congress is working on legislation which makes bankruptcy much tougher to file.

Two Forms, Two Results
There are two forms of personal bankruptcy that are currently popular in the United States. Chapter 7 is what is usually referred to as a "Straight Bankruptcy", while Chapter 13 is usually called a "Consolidation Bankruptcy".

The problem with Chapter 13 is that it's almost completely useless. With this approach, you end up paying back most, if not all of your debts over a three to five year period, with the added BONUS of having a bankruptcy on your credit report for the next ten years! This is surely not a good move in anyone's book. Which is why most people file for Chapter 7 bankruptcy.

The way Chapter 7 works is that some portion of your personal property is considered "exempt", meaning your creditors cannot touch that property. In most cases, this exempt property includes a car, a certain amount of your home's equity, certain personal property like clothing, and some other assets. The qualifying property and bankruptcy details vary from state-to-state.

With Chapter 7, any property that is not exempt is sold or "liquidated", with the proceeds distributed to your creditors under court supervision. And because most people who claim bankruptcy have only exempt property to their name anyway, there is usually little that can be sold, which leaves creditors with nothing.

In the United States, it has become quite easy to file bankruptcy, to the point where many people mistakenly view it as a free lunch. What people don't realize is the fact that there are hidden costs associated with bankruptcy that make it a very bad choice for most people.

The Hidden Costs - Explained
So what exactly are these hidden costs? The truth is simple - every important purchase you make for the rest of your life will be very expensive. This is because your bankruptcy will remain on your credit report for the next ten years.

Here's a prime example: let's say you want to buy a house five years after filing for bankruptcy. If you are in good financial shape at that point, and do qualify for a mortgage, you may be able to buy the house without a problem. The big problem here is that you'll automatically pay a higher interest rate than the average person who has never filed for bankruptcy.

Let's look at the total payout. Assume you buy a $250,000 home a few years after filing for bankruptcy, and you make a $25,000 down payment. Let's also say that you qualify for a loan at 9.0% on the remaining $230,000 mortgage, as opposed to the 7.0% rate you would qualify for had you not filed for bankruptcy. First off, you might think that the two percent extra you're paying is worth it for having filed. We would say, DEFINITELY NOT!! That extra two percent (which seems rather small), will increase your monthly mortgage payment from $1530, to a whopping $1850, and the total payments will be more than $115,000 higher!!

This example is a prime demonstration of why bankruptcy is anything but a free lunch. But, if you do have no choice, you may have to proceed. But the majority of people who take this option really don't know what they're getting themselves into. Desperation, sadly, allows us to be talked into the "bankruptcy free lunch" without understanding that the long-term costs are unbelievably high.

After years in the credit negotiation industry, we at Debt Consolidation Advisors can offer you three important insights that we've seen first hand.

1. Most personal bankruptcies are unnecessary, simply because in most cases, there are better options available that have not been properly explained to the individual.

2. Many people file bankruptcy only because they feel forced to. They don't realize that there are other options available, and because their creditors are aggressively pursuing them, they feel pressured to file.

3. To most people, the word bankruptcy effectively means one thing: failure.

There is one more important approach. Click here to read about debt negotiation, Debt Consolidation Advisors's key focus.

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