The financial pressures Americans find themselves in are unparalleled in modern times. While nowhere near Depression-era panic, there is little doubt that the financial fortunes of a good many Americans are sliding—and it's cutting a wider swath this time. With so much speculation in the bull markets of the last two decades, along with easy credit and ballooning mortgage levels governed less and less by adequate checks and balances, the sinkhole that was 2007 and the first half of 2008 has left many Americans marooned without a lifeline. While individuals used to living from paycheck to paycheck will obviously suffer while on a journey down a road they have traveled before, this time the kick to the nether regions of the nation's economy is paining a larger segment of the population—especially individuals who saw their homes, or real estate holdings as the most important piece in their financial puzzle.
House values have plummeted, and foreclosures are continuing to rise dramatically. While the Bush administration hurried financial aid through Congress, there is little more that a lame duck Administration can do on the eve of what will obviously be a pivotal election in the nation's history.
For many, a word that was never even thought about, let alone whispered in hushed tones, is suddenly being articulated as the preferred, if not the only option.
Bankruptcy. And Americans can be forgiven for the long-held fear that not only is bankruptcy itself painful, but that financial recovery is impossible. A bank will never lend to you, a credit card will never be in your wallet, the dream of owning your own home and successfully obtaining a mortgage will never again be in your future.
Not so, and here's the good news. Bankruptcy is not the disaster it once was, and is increasingly being thought of as a solution, admittedly a challenging one. Jim Lynch, the Chief Executive Officer of Leaders Bank in Oak Brook, was quoted recently in Fortune Small Business Magazine as saying "bankruptcy used to be the financial equivalent of a scarlet letter."
Not so any more, although the reasons for a bankruptcy application will carry certain weight. For example, a bankruptcy that grows from catastrophic medical expenses will not be viewed with disdain. A medical condition often cannot be predicted, and given the current challenges of the nation's health care system (a subject of considerable debate in the upcoming Presidential election), a bankruptcy arising from such a situation would be considered a prudent, albeit an unfortunate option. Catastrophic medical debt remains the leading cause of personal bankruptcies in this country, according to a recent Harvard study. "These could befall anyone," says Leaders Bank's Lynch, "so a bank is unlikely to hold them against you."
It is reasonable to assume that the same would also be true for an unexpected downturn in the economy, including the dramatic devaluation of house prices. If your home drops so much in value that it is worth less than the mortgage liability—and worse, if you are suddenly in need of accessing the equity you have left in the home by selling the home, but prove unsuccessful in an impossible market, a bank is not going to hold that bankruptcy against you down the road.
That said, if your financial woes were caused by a patent inability to manage money, or your bankruptcy grew out of an ill-advised purchase, then don't be surprised to see a lender take a pass.
In 2008, the myth that a bankruptcy will ruin your credit forever is just that—a myth. According to the law of the land a bankruptcy can only remain on an individual's credit history for ten years, and many credit agencies will purge the black mark from your record long before then.
For the business owner looking to grow his or her business, a prior bankruptcy should not prevent a serious consideration provided the existence of a steady income, low and manageable debt, and payments that are made on time.
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It could actually be the preferred option. Oh, it will hurt—like slamming your wrist against a brick wall. The injury at first will be a shock to the system and without doubt painful. But over time the pain will fade, and the wound will heal with proper medical care. A bankruptcy is no different, provided you have proper legal care.
A qualified bankruptcy attorney can guide you through the minefield, ensuring that in time you come out weakened, but not dead—and ready to fight another day.