According to a new report from the Federal Reserve Bank of New York, debtors in Illinois and around the country are more likely to avoid filing Chapter 7 or Chapter 13 since the 2005 bankruptcy law overhaul. However, the report also indicates that bankruptcy may not be as bad as many would like the public to believe it is, largely due to a poor general understanding of how bankruptcy works.
The report states that people who sink into insolvency rather than filing bankruptcy not only stand to lose substantial amounts of retirement savings but are also less likely to pass basic creditworthiness tests and obtain lines of credit than those who file for bankruptcy. In some cases, the report says, bankruptcy is actually a solid strategic financial move that shows potential creditors that the debtor can recognize a poor economic position and take steps to amend it.
Much of the negative public perception of bankruptcy comes from debt consolidation companies, which have a vested interest in convincing consumers not to file bankruptcy, or the perception that it is too difficult and costs too much. This results in more debtors struggling with heavy debt services and making only monthly minimum payments. The report says debtors who file bankruptcy actually have access to more and better large-purchase credit.
When determining whether Chapter 7 or Chapter 13 bankruptcy is appropriate for a given client, an attorney might begin by looking at the client's payment history and overall financial health to determine whether or not the client is in a position to repay any or all of the outstanding bills. The attorney may then offer a settlement to the client's creditors reducing or eliminating the debt service or pursue the case in court.