Bankruptcy
Bankruptcy isn't always best way to fix debt woes
by
Robert K Heady
Banking Columnist
April 28 2003
FORT LAUDERDALE, FL --
When is it right -- or wrong -- to go
bankrupt? That's the dilemma facing millions of Americans who are deeply in debt
and seeking the best way out.
Last year 1.5 million of them elected to take the
bankruptcy route. But the bad news is that when a new Bankruptcy Reform Act is passed
by Congress, they won't be able to wipe out all their bills as in the past. The
House has already approved the measure, and the Senate will address it soon.
Biggest tragedy? Not only the fact that a bankruptcy
stays on your record for 10 years, but that banks, credit card and finance companies have poured hundreds of millions of dollars into congressional pockets. They claim
they want to correct "abuses" of the bankruptcy system by consumers who walk away
from what they rightfully owe to creditors.
Oh, yeah? The real story is that average Joes and
Janes, already in hock to the tune of $1.78 trillion, not counting mortgages, are
bombarded by 5 billion credit card solicitations per year. That potentially adds
another $3 trillion to their debt load.
"Today bankruptcy is considered to be the first
alternative to debt problems, whereas years ago it was thought to be the last,"
observes
Howard Dvorkin, president of Consolidated Credit Counseling Services 1-800-320-9929.
"Basically, it's a matter of the person's inherent willingness to solve their money
problems -- it's about integrity."
There's no easy answer because each state has its
own laws regarding the liquidation of assets. Plus, in at least five states, you
can keep your home no matter what.
"The real defining difference is the person's debt-to-income
ratio and potential for earning money to pay off debts," says April Lewis-Parks,
Dvorkin's director of education. "If they've cut the fat out of their expenses but
have no way to make additional income -- say they need $2,500 a month to keep creditors
satisfied and have money to live on, but only make $2,000 a month -- they are a
candidate for bankruptcy."
The first thing they should do is seek credit counseling
and do a budget analysis before exploring bankruptcy, adds Lewis-Parks. "The counselor
will determine if a debt management or hardship program will help.
There is no reason
a young person should jump on the bankruptcy bandwagon. They usually have great
income potential, and to ruin your credit for seven to 10 years at an early age
is setting yourself up for a long financial battle."
But what about those dozens of e-mail spam/scam
messages you get from debt settlement outfits, promising you can "terminate" all
your debts and thus avoid bankruptcy altogether?
A Rhode Island reader got such an unsolicited e-mail
the other day. Citing an "eight-year track record of success," the company (which
could even be some guy working out of his garage) rattled off a long list of the
benefits: "Terminate your credit card debt and unsecured loans. You pay nothing
-- major credit cards only, no department store or gas cards. Stop harassing phone
calls. Stop debt collectors in their tracks. Stop making payments immediately."
"The only drawback," the pitch went on, "is that
you will have bad credit for nine months. Unlike bankruptcy, this is completely
private. No public disclosure. You will not lose your home, cars or any other assets.
We will eliminate all your debt or your money back."
What money? The $1,995 they want for their services.
There's no company name in their e-mail, just a
phone number. And when you call it, there's merely a recorded message asking you
for your
number and other personal details.
The bottom line, warns Consolidated's Dvorkin, is
that "if it sounds too good to be true, it probably is." Beware of outfits that
promise to clean up your credit record, he adds, because "only original creditors
can input to credit bureaus. Others have no direct control."
According to Dvorkin, about one-third of all callers
enroll in a formal counseling program; another one-third get "words of encouragement
and pick the counselor's brains," and the rest simply "tread water but don't solve
their problems." Of the latter, fewer than 10 percent actually wind up filing for
bankruptcy.
