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-- Posted: June 27, 2000

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

I know the upside of bankruptcy

Dear Dollar Diva,
My husband and I are 40 years old and we are $37,000 in debt. We went to a credit counselor, and can't afford their payment schedule. We have just spoken to a lawyer about bankruptcy and he recommends that we file under Chapter 7.

What are the long-term consequences of filing for bankruptcy?

Bankruptcy is a last resort. You can call on it when you're in so deep that there's just no other way to dig yourself out. It gets the bill collectors off your back, and gives you a fresh start.

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But every benefit carries a cost. Bankruptcy sullies your credit report for 10 long years. It's going to be hard to get a low interest mortgage or car loan for the first couple of years after the bankruptcy. You may even have a problem opening a checking account, and you may even be turned down for the job of your dreams if the company does a credit check before hiring.

However, putting the situation in perspective, with $37,000 in debt, the Diva doubts that your current credit report is ship-shape enough to impress anyone, so it may not make that much difference. If you decide to file for bankruptcy, and focus your future energy on setting financial goals and meeting them, time should take care of the rest.

Chapter 7: The "liquidation" chapter

In theory, when a person files for protection from his creditors under Chapter 7, his assets are liquidated, or sold, and the money received from their sale is used to pay off his creditors. In practice, most of his assets, such as his home, car and retirement plans, are "exempt" from liquidation, and few, if any, of his things are actually taken and sold.

Chapter 7 will discharge unsecured debt such as credit cards, medical expenses, legal fees, rent and utilities. But don't count on it to wipe out student loans, taxes, alimony and child support. In addition, Chapter 7 is not going to be much help if your debt is primarily from secured loans, such as a mortgage or a car loan.

Before you actually start the wheels rolling, it's a good idea to do some homework so you understand what you're getting yourself into. The library is a good source of bankruptcy books. If you like to shop online, try the inexpensive paperback by James P. and John M. Caher, Debt Free! Your Guide to Personal Bankruptcy Without Shame.

Most people who file for bankruptcy are honest, hard working folks, like yourself, who have succumbed to the lure of easy credit. The Diva is happy that bankruptcy is available to give people a second chance. However, if overspending has become a way of life, and you think you're going to have a problem staying out of debt, find a support group like Debtors Anonymous to help you stay on track

Beware of the bottom feeders

If credit cards are one of the reasons you're $37,000 in the hole, it's obvious that plastic is your enemy. Don't get hooked by those hungry credit card companies that go fishing for folks like you the minute your bankruptcy proceedings are finished. They know that most of your debts were discharged, and they're looking for a piece of that extra cash that should be showing up in your pocket each month. The Diva's advice is to pay cash for what you need, live frugally, and save your extra dollars for unexpected emergencies and long-term goals.

If the debts start piling up again, you may find yourself on a free fall with no where to go but down. Once your debts are discharged under Chapter 7, it's goodbye safety net. You will have to wait six years before you can use this last-resort option again. If you think the bill collectors were devils before you filed for bankruptcy, imagine how they'll be when that threat is gone.

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