When is bankruptcy the right choice and when is it not

Bankruptcy is relatively easy. Over a million people file for personal bankruptcy every year. (In 2001, the number was over one and a half million.) For some people, it’s the sensible option. If a medical crisis kept you out of work or left you with extraordinarily high medical bills; if an accident or disease has left you with a disability that reduces your ability to earn an income; or if a divorce has left you with high debts, child care responsibilities, and a reduced income, your debts may be beyond your ability to repay.

But a large and growing number of people who file for bankruptcy are doing it for the second time. For people who’ve arrived at bankruptcy as a result of careless spending and a casual reliance on credit, bankruptcy can be seen as a quick fix that will solve a chronic debt problem. It’s not. Bankruptcy doesn’t get at the underlying root of a debt problem. Only you can do that. If debt spending is your problem, the only way to solve it is through a long-term commitment to debt reduction. It’s your money behavior that needs to change.

The problems bankruptcy doesn’t solve

Beyond the fact that it doesn’t solve most people’s debt spending problems, bankruptcy brings with it some other penalties.

• For the next ten years, your bankruptcy will be reported as part of your credit record when you apply for a loan, rent an apartment, or apply for a job.

• Your bankruptcy will be reported as part of your credit record forever when you apply for a job that pays more than $20,000 a year or for a loan of more than $50,000.

• When you look for a job, an employer may see your bankruptcy as a reflection on your character. It may be the deciding factor against you when you are compared to another candidate.

• When you look for an apartment, a landlord may see your bankruptcy as a warning that you’ll fall behind in your rent, and can use that information when deciding to rent to someone else. • You will find it very difficult to re-establish credit, at least for the next few years. You might be able to get a credit card with a low spending limit—but with a requirement that you keep at least that much on deposit at the bank that issues the card. You might be able to lease a car—if you are able to pay 70 percent of the total value of the lease up front.

• The Internal Revenue Service gets a report of the bankruptcy settlement and considers as income any debt from which you are released. You will owe income tax on that amount.

Bankruptcy has its place. For people who have gotten into financial difficulties that really are beyond their ability to resolve, it offers a way to make a fresh start on sound footing. But for many—perhaps most—of the people who now use it, bankruptcy simply extends money problems into a lifetime of juggling and worry.