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How Insolvency May Be Avoided

How Insolvency May Be Avoided
"""With Personal Insolvency According to government statistics, there are numerous reasons why the number of personal bankruptcies continues to rise exponentially each year, approaching two million per year. Credit lines and credit cards are more accessible than ever to people with varying qualifications, the adjustable rate and negative amortization loans that sparked our current mortgage lender crisis have resulted in many homeowners' monthly mortgage payments rising, and the national unemployment rate continues to rise. Even the spiraling divorce rate, as partners seek to discharge mutual debt-loads, has contributed to the acceptance of bankruptcy reaching historic levels.

Most people are aware that the government's bankruptcy program, which is now a century old, provides legal protection for debtors who cannot or are unwilling to repay the majority of unsecured debt. Secured debt (loans or mortgages on vehicles or homes that can be repossessed or foreclosed upon) is inaccessible. In some cases, bankruptcy protection can eliminate credit card and personal loan debt for those who are experiencing authentic financial hardships.

Numerous varieties of bankruptcy protection have evolved in the United States. Municipalities and government-controlled utilities, for instance, can file for bankruptcy under Chapter 8, while family farms and family fishermen can file under Chapter 12. There are also a number of programs for businesses, but the vast majority of consumers use Chapter 7 or Chapter 11 bankruptcy. In actuality, most attempts to file for Chapter 7 bankruptcy - the traditional type in which all applicable debts are liquidated - result in Chapter 11 bankruptcy, which is designed to restructure existing debts by reducing balances and compelling borrowers to enter into three- to five-year payment plans.

Legislation enacted in 2005 has severely restricted debtors' options for declaring bankruptcy. Borrowers are only eligible for Chapter 7 bankruptcies if their income is deemed to be less than the state's median income (regardless of the malleable nature of most modern incomes through bonuses and seasonal bumps or the great differences in regional income found in the wealthier states; salaries in Bakersfield or Fresno are significantly lower than in San Francisco or San Jose). It is crucial for anyone contemplating bankruptcy to research their state's median income level and compare it to the specific period that the IRS would examine when determining eligibility. Too many debtors are unaware of how drastically the bankruptcy laws have evolved in recent years.

For one thing, despite the fact that access to credit cards for previously unqualified consumers has increased dramatically over the past decade, demonstrably poor credit (and nothing appears to be as devastating as a bankruptcy) can utterly destroy the financial future of young families or eliminate the final aspirations of older borrowers. A bankruptcy filing may remain on a borrower's credit report for up to ten years, resulting in a decline in FICO credit scores; the negative effects of such notations cannot be overstated. A bankruptcy record could prevent consumers from continuing their education, purchasing residences, renting apartments, and leasing vehicles, among other normal activities. In today's society, credit reports determine whether applicants are considered for employment, whether they are granted security clearance, and in some cases, whether they are accepted on dating websites. Filing for bankruptcy may also entail avoiding all the anticipated aspects of life where credit is so crucial.

All those seeking bankruptcy are now required to attend a class on credit before they can file, as well as a class on debt management before they can be successfully discharged; both courses are paid for by the borrowers (often to a significant degree). In addition, while debtors have always been required to itemize their possessions and assets when filing for bankruptcy, the federal government now assesses the value of all such items based on their potential replacement cost. Using replacement value instead of, as in previous years, actual resale value that accounts for depreciation increases the likelihood that courts will auction off domestic items or family heirlooms to partially repay creditors. Few consumers declaring bankruptcy are aware that they may lose all accumulated goods and possessions, and there are countless accounts of helpless filers who witnessed the sale of their most cherished property and wished they had tried harder to avoid bankruptcy when they had the opportunity.

Chapter 7 may appear risky, but successful completion of the program will eradicate a significant portion of the borrower's unsecured debt. As previously stated, Chapter 11 bankruptcy only restructures the debt. Balances are reduced, but never by more than 50 percent and frequently by a much smaller amount. Clearly, this causes the same problems for the debtors as before they filed for bankruptcy. In many instances, the shortened schedule can make repayment even more difficult. In essence, the courts examine a portion of the borrower's past income and extrapolate from there the borrower's capacity to repay creditors. This is yet another instance in which salaries dependent on seasonal raises or bonuses may be unjustly analyzed based on the specific period of annual income that the court may examine.

Even if the trustee makes a reasonable assessment of the debtor's incomes, Chapter 11 bankruptcy presents additional challenges. Similar to how Chapter 7 eligibility is determined by the debtor's state's median income, the Internal Revenue Service has calculated the living expenses for each state (avoiding differences in rental or home ownership costs between, say, Jacksonville and Miami). The significant differences between the IRS' arbitrarily determined living expenses and the day-to-day realities of what individuals actually need to survive are typically disregarded by the courts. In this manner, families are compelled to relocate, change vehicles, or even remove their children from their preferred school. The mounting debts must still be paid, but under Chapter 11 bankruptcy protection, court-appointed officers determine your family's spending habits for up to five years. This is a far cry from a simple and painless alternative to changing one's lifestyle.

For the majority of Americans contemplating bankruptcy, the true culprit is their spending habits. Certainly, a number of borrowers endure genuine financial calamities, such as accidents, illness, unemployment, and family strife, but even they should examine their personal economic plan to determine if there aren't methods to cut back. Too many bankruptcies are incurred as a result of consumers falling prey to advertisements and a general decline in cultural values that result in mortgage obligations. In the past, borrowing from Peter to pay Paul was considered the pinnacle of self-destructive behavior; however, in today's modern economy, taking out cash advances from one card to meet the minimum payment requirements of another card is viewed as the cost of living.

After all, consumers do not incur thousands of dollars in debt overnight. Leaving aside those who have endured genuine hardships with unanticipated hospital expenses, the overwhelming debt loads of the majority of Americans are the result of a lifetime of frivolous spending. Our national character has become almost sanctified by excessive spending. The national debt should not come as a surprise, given that we are taught to buy whatever we want, regardless of the consequences. Inevitably, cards with initially low interest rates increase to fifteen or twenty percent, debtors obtain additional credit cards to assist with existing payments, spending becomes a lethal addiction, and, seemingly overnight, bankruptcy appears to be the only option.

The obvious solution would be to avoid the initial charges or to begin budgeting for wants and necessities in order to limit potential debt-load increases before the mounting bills require external assistance. Secured credit cards provide immediate assistance. Since the potential credit balance available on secured credit cards is limited to the amount of money the cardholder has already paid to the card, there is no way to incur debt while taking advantage of credit cards and services that only accept plastic. Reduce existence to its essentials: food, shelter, and utilities. For many families, vehicle expenses and clothing budgets could be temporarily reduced by utilizing public transportation or second-hand stores; with the aid of a new mentality, food budgets can often be significantly reduced by preparing at home and purchasing fewer pre-packaged items. The resulting menu may not be as appetizing, but anything that prevents bankruptcy must be supported.

In a similar manner, many debt problems are caused by overzealous home ownership among borrowers who lack the necessary cash flow to actually afford their ideal home. Unfortunately, this frequently necessitates taking out loans with minimal (or no) down payments and submitting to the worst schemes of unethical loan officers. Adjustable loans only paying interest may appear reasonable for the first year or two, but as the rates inevitably increase and the balance rises due to the fact that the borrower is only paying the majority of the interest, most home-owners without a sudden windfall are no longer able to refinance for longer terms. It is comprehensible, but predatory lenders are more to blame. The American dream is still to own a property, but the resulting monthly payments and inevitability of foreclosure can quickly turn into a nightmare.

It is simple to see how bankruptcy could have been avoided after the fact. Proper financial management, a reluctance to purchase luxury items or amusement until savings reach a predetermined threshold, and reasonable housing expenses can make all the difference in the world. Obviously, it is already too late for some, and, to be fair, unanticipated medical expenses or unemployment render such advice useless. If the stack of expenses cannot be paid and the minimum payments on revolving debt approach half of the gross monthly income, action is required. Nonetheless, there are alternatives to bankruptcy and methods to avoid losing possessions or living on a court-ordered budget. Even if they are overburdened by unpaid debts and collection agency harassment, a responsible borrower should investigate all alternatives to bankruptcy.

The majority of Americans have already been inundated with advertisements for consumer credit counseling agencies, which are actually quite similar to Chapter 11 bankruptcy. Borrowers must still pay the vast majority of what they owe, artificially shortened payment terms may make the process more difficult (regardless of negligible balance reductions or temporarily reduced interest rates), and the impact on their credit is comparable to that of bankruptcy. Concerningly, despite collecting fees from debtors, many consumer credit counseling agencies are also paid by credit companies, raising the question of whose interests they serve.

Debt settlement companies, on the other hand, only represent the borrower. In its simplest form, they evaluate a debtor's potential for repayment and, using their experience with each type of lender, negotiate an immediate reduction in the amounts owed, as well as an end to calls from collection agencies and wage garnishment threats. There is still a repayment program, but it is significantly more beneficial to the client and takes into account their fluctuating income and expenses (such as a sick child) that cannot be eliminated. Specific results depend on the circumstances of each borrower, but successful negotiations typically result in a forty percent reduction in total unsecured debt with minimal impact on credit reports or FICO credit ratings.

Despite the fact that each borrower requires a unique solution for their particular financial crisis - and despite the fact that the best way to avoid bankruptcy is to never allow consumer bills to take over a borrower's life - it is, once again, a good idea to explore alternative options. In the aftermath of the escalating credit crisis in the United States, a variety of alternatives have emerged as the ability to declare bankruptcy has been severely restricted. There is no single solution besides domestic frugality, but every consumer should be aware of alternative options.""

" - https://www.affordablecebu.com/

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"How Insolvency May Be Avoided" was written by Mary under the Finance / Wealth category. It has been read 91 times and generated 0 comments. The article was created on and updated on 03 June 2023.
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