bankruptcy: What You Need to Know

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Informal Bankruptcy

Informal and bankruptcy are two words that do not seem to go together well. When you think of bankruptcy, you think of petition filings, lawyers, dischargeable debt, exemptions, and more. The complexities can be staggering. So what is an informal bankruptcy and why are there more and more in recent years?

Informal bankruptcy is a more appealing way to saying “deadbeat.” Someone in “informal bankruptcy” has stopped paying all their bills and has moved and left no forwarding address. They do not have bank accounts or other assets. This causes them to become “judgment proof.” Even if a creditor won a judgment against them, it is next to impossible to collect the money owed.

There has been a sharp increase in the number of people who opt to follow the informal bankruptcy route instead of filing for chapter 13 or chapter 7 bankruptcy since 2005. This was when the Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law. This made filing for bankruptcy a much more difficult process. Here are some major changes that made the number of informal bankruptcies climb:

  • Fewer people qualify for chapter 7 bankruptcy, which clears all debt. Instead, they have to file for chapter 13, which reorganizes debt for repayment.
  • Credit counseling is mandatory before filing and before debts can be discharged. This is beneficial to the consumer, but it adds yet another expense.
  • Bankruptcy attorneys are now required to conduct investigations into their clients’ finances and can be held liable for any misinformation. Because of the extra work, they charge more to handle bankruptcies, further burdening the filer.
  • The new laws do not stop evictions.
  • The amount of debt required to be repaid in chapter 13 has increased. Previously, even those filing for chapter 13 could discharge some of their debts when they agreed to a payment plan. The new laws limit the discharges severely.

All of the added expense has added even more stress to filing for bankruptcy, which is why more and more people are just foregoing the whole process. They are also foregoing the payment of their bills.

Sound good? Who doesn’t want to leave their pile of unpaid bills behind and start over? There are severe ramifications though, for going through with informal bankruptcy. First, the statute of limitations on most debt is seven years. This means that after you abandon your debt, you have several black marks on your credit report. If you have five, six, seven, or even more creditors trying to collect money, there is no way you can get more credit. Even a secured credit card with high interest rates and low limits will be out of reach. Forget getting a car loan or mortgage. Unless you have the cash to pay for a new car, you’ll be walking for the foreseeable future.

Another downside is that some states will garnish your wages. If you have a good job and like the state that you live in, informal bankruptcy is not a smart idea. Traditional bankruptcy may actually benefit you more. Some states also have unlimited homestead exemptions, which means that you would be better off filing for bankruptcy as you can retain your home and money invested in it.

Running away from your bills may sound like a good idea, but the impact can be far more damaging than filing for bankruptcy. A far more sound decision is to visit a debt settlement company and find out how they can help you reduce and pay off your debt.