What You Need to Know About Personal Bankruptcy

As the economy continues to falter, more consumers are finding themselves in the face of bankruptcy. Federal court filings for personal bankruptcy in June 2007 total 934,000 up more than 28% from the petitions the year prior.

Tamara doesn’t come across as the kind of person who would need to file for bankruptcy. A little more than seven years ago, she was working as a software developer for a large consulting company, bringing in more than $100,000 annually.

But in 2000, things started to spiral out of control for Tamara, who requested her last name not be printed, when she was hit with back-to-back medical problems that required surgery, taking her out of work.

“I had used all my 401(k), stocks, savings, you name it,” she said. “It put me out of work for close to four years.” Tamara found herself in a seemingly neverending hole of medical bills, mortgage and car payments and student loans.

Finally, in 2007, one month and $1,000 away from her home being foreclosed, she contacted an attorney who was willing to help her file for bankruptcy.

Tamara’s not alone. As the economy continues to falter, more consumers are finding themselves facing bankruptcy. Federal court filings for personal bankruptcy in June 2007 total 934,000, up more than 28% from the petitions the year prior.

“The bottom line was, I wanted to pay my bills, but I didn’t know how to do it. My debt was so massive with interest, I had IRS issues, student debt, and several years worth of taxes, I wanted to get everyone paid, but I didn’t even know where to start.”

Tamara’s story is a familiar one for bankruptcy lawyers, and the trend of never-ending debt, mounting missed mortgage payments and lengthy credit card statements will continue to grow in the coming months.

“More than a million cases will be filed this year, and with most of them there will be an underlying theme of heavy debt burden and an adverse economic event that will push people over the edge like a job loss, family break up, or uninsured medical expenses,” said Sam Gerdano, executive director of the American Bankruptcy Institution.

But don’t jump the filing gun just yet, warn some bankruptcy lawyers.

“This should be a last resort. If you can avoid filing, don’t,” said Jonathan Ginsberg, a bankruptcy lawyer in Georgia. “If you’ve got less than $30,000 to$40,000 of unsecured debt, try to find another way, but once you hit $45,000 to $50,000 in credit card debt, it’s going to almost impossible to pay that off.”

Ginsberg said credit card debt of that magnitude becomes impossible to pay off because the interest rates of 17% and beyond leave the debtor losing ground.

“I’ve seen people pay six, seven years and not get anywhere, they look at their statement in January and it’s the same amount as it was in December because of the high interest rate, so unless you can pay a lump sum payment, that’s going to drive you to bankruptcy.”

Because the economy is so reliant on consumer spending, bankruptcies are a fact of life, according to Gerdano. “We are not a nation of savers, so families don’t have a cushion to sustain themselves through an unexpected downturn.”

Many bankruptcy lawyers have not only seen an increase of traffic in their offices in the last six months, but also a change in the type of clients seeking help.

“I am seeing people I’ve never seen before,” said Ginsberg. “People who have been working for 20 plus years, higher earners making $70-$80,000 a year can’t make it work.”

Here are a couple things to keep in mind if you decide to file for Chapter 7 personal bankruptcy.

It stays with you for 10 years

Current laws prohibit you from filing for bankruptcy for another six years, and your filing stays on your credit record for 10 years.

But just because you’ve filed for bankruptcy doesn’t mean you have bad credit.

“You can recover and you can eventually get a credit card, it won't prevent you from getting a 700 credit score five years later,” said David Waltzer, a New York-based bankruptcy lawyer.

Expect a Lifestyle Change

After you file for bankruptcy, your access to credit will be restricted.

“It is very difficult to lead the kind of lives more people are used to without access to affordable credit -- there’s always second chance credit but they are so expensive with higher interest rates and major consequences if you miss a payment,” Gerdano said.

Not all Your Debt is Erased

Certain debt obligations don’t go away after filing for bankruptcy. Non-dischargeable debts, like student loans, alimony and some mortgages, will generally stay with you.

It’s Not Free to File

A law passed in 2005 to try to reduce the number of personal bankruptcy filings has made the process even more expensive for struggling consumers.

“When I started I would charge around $500 for a filing. Now with all the extra amount of paperwork I am forced to charge around $1500,” Ginsberg said.

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