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Even beyond the inevitable consequences to borrowers' credit reports and FICO scores (and, ever after, having to admit to bankruptcy for potential landlords, employers, or, in all truth, mates), recent legislation has made the decision to file increasingly punitive.
Those seeking Chapter 7 protection must face the loss of household necessities/family heirlooms and themselves pay to attend debt-management classes before discharge.
Moreover, fewer and fewer borrowers even qualify for Chapter 7 as the arbitrarily-determined court 'means test' compares each applicants' income and living expenses to a governmentally-compiled list.
And, should any part of the bankruptcy attempt be found fraudulent (forgotten income or accounts not touched for a decade), the filers may be liable for legal proceedings.
In most circumstances, the modern borrower would be better served by avoiding bankruptcy and investigating alternatives such as debt settlements.
Nevertheless, there still exist consumers with sufficient financial hardships - sudden medical emergencies, long-term unemployment, familial trauma - who would best fit the bankruptcy model (or, to be frank, would not qualify for other alternatives).
The following seeks to specify which reasons would preclude debtors from seeking other forms of relief.
This is not an indictment of those that cannot choose debt settlement, there's any number of explanations for insolvency, but merely a clarification of current practicalities as regards debt relief.
First of all, each borrower should take a close look at his or her income.
As a good rule of thumb, for debt settlement or similar options, borrowers should have the capacity to devote a minimum of two percent of their entire debt balance toward monthly payback - for instance, ear-marking $400 a month of income for every $20,000 owed.
This is, again, just a ball-park example, every borrower's circumstances are different, but almost every debt settlement program requires commitments of at least one and half percent (and consumer credit counseling requirements tend to be quite a bit higher).
If there's any question of inability to regularly meet such an amount, bankruptcy's likely the only option.
Similarly, income fluctuation can render even the most sincerely-minded individual helpless as regards creditors.
The success of settlement programs depends upon strictly-mandated repayments.
Even one slip-up can ruin the entire system and leave the borrower liable for penalties or a complete dissolution of the settlement agreement.
For those self-employed or dependent upon seasonal boosts without savings to balance the occasional bad month, settlement programs can do more harm than good regardless of the debtors' sincere wishes.
In a different way, much depends upon prior relationships with creditors.
If the borrower has taken out significant cash advances or purchased luxury items without any indications that they intend to repay, the creditor may quite reasonably assume fraudulent behavior.
Debt settlement's are made that much more difficult by debtors who initiate large transactions just before their designated professionals attempt negotiations.
This sort of financial activity will still make declaring bankruptcy much more difficult but, regardless of surrounding circumstance, should make attempts toward debt settlement impossible.
Of course, recently acquired debts that the borrower has never attempted to repay and a fluctuating income (or, simply, diminished income) are immediately understandable reasons why debtors would not qualify for settlement programs, whatever the specific circumstance, but it's a bit harder to explain the next point: secured loans.
Since the debt settlement specialist has to maintain some leverage within his dealings, debt tied to property easily repossessed or foreclosed upon doesn't allow for the proper vantage point for negotiations.
Unfortunately, since state-to-state- exemptions often protect vehicles and homes from governmental restitution during bankruptcy, it's best for every borrower with significant equity in either to research their specific state's laws before first seeking the settlement alternative.
Finally, this last point's not actually one of legal practicalities but rather an ethical one.
The purpose of debt settlement, after all, should be to protect the borrower from the credit-ravaging consequences of bankruptcy.
Either Chapter 7 or Chapter 13 protection effectively disables the debtor from attempting similar mistakes for up to a decade.
However, if there's a pattern of behavior clear to the settlement professional, they'll often try to dissuade the borrower from what seems to be merely a stop-gap in a longer series of unwise decisions.
For all the horrific effects, bankruptcy does remove the filer from the credit pool, and, for some borrowers, that may be the wisest move.
As we've said, every debtor's situation's utterly distinct.
It's best to consult with professionals of every stripe - as well as family and friends - before undertaking any serious move.
Bankruptcy's not often the best alternative for careful borrowers.
The repercussions upon credit reports and FICO scores can disrupt lives for years to come, and, from loss of possessions to forcible submission to court-mandated budget, the effects of the 'cure' may seem worse than the disease.
Still, considering the restraints put upon debt settlement negotiators and other credit professionals, some debtors might not have a better alternative.
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