The last time a major change was made to bankruptcy laws was in 2005, when new regulations were passed that made it more difficult for people to file. Due to the stigmata that tends to be associated with filing for bankruptcy, it was considered by many to be a good move. However, while individuals in Texas and elsewhere may feel branded for filing, businesses use it regularly and are lauded for doing so.
A study finds that instead of viewing bankruptcy as a bad thing, it is something that many people should strongly consider if they are overwhelmed by debt. The Federal Reserve Bank of New York reported that people who file for bankruptcy tend to have better outcomes than those who continue to struggle with their debts.
The study looked at two sets of people who were considered to be insolvent, comparing those who stayed the course and those who filed for bankruptcy. Individuals who kept trying to pay off their debt were found to have less access to credit and were in a poor position to save for retirement. Conversely, people who filed for bankruptcy generally saw a significant and rapid increase in their credit scores, with some individuals able to obtain good rates on car loans and home mortgages within just a few years.
One of the best ways to prevent the downsides of filing for Chapter 7 bankruptcy from having a major effect is to understand what they are and to plan for them. A lawyer can explain to a client what is involved in the filing process, what debts they can expect to be eliminated and what the possible consequences are for their credit rating. This information could put someone in a better position to recover from debt and rebuild their credit faster.
Source: FOX Business, “How Avoiding Bankruptcy Can Backfire”, Steve Rhode, March 2, 2015