Consumers running out of debt management options

11.18.08
By Timothy Jones

It is a scenario that is becoming more and more common. A couple of years ago, your finances may have appeared to be in fine shape - but then the credit crunch happened and these foundations were suddenly shaken.

Amid general economic uncertainty, lenders are drawing back, tightening their criteria for loans and credit.

That means that these days, people are left with fewer options for managing their debt.

For example, many struggling homeowners who would have previously been able to take out an additional loan, refinance their mortgage or utilize their home equity line of credit have found themselves unable to do so in the current climate.

According to an article in the New York Times, a lot of these people are finding themselves on the brink of declaring bankruptcy. More than 880,000 people have already filed this year, according to the American Bankruptcy Institute.

Not only are the numbers higher, but people are in a more precarious position. This year's filers are carrying more credit card debt and secured debt than the typical family who declared bankruptcy near the beginning of this decade, the article states.

Experts say the most common reasons that people file for bankruptcy include job loss, divorce, unexpected expenses and significantly overextended credit.

However, many people who were sold risky mortgages in the past several years are also considering this option.

"When these adjustable-rate mortgages started resetting from their teaser rate and clients couldn't refinance their way out of trouble, they were getting behind even though there was not catastrophic event," bankruptcy lawyer Chip Parker told the publication.

There are two types of consumer bankruptcy options. One option - chapter 7 - will completely remove unsecured debt - which includes credit card debt and medical and utility bills. Any secured debts - such as mortgage loans - will remain.

Meanwhile, chapter 13 bankruptcy is an option for people who do not have much unsecured debt and are mostly concerned with holding on to their homes. If you choose this path, you agree to a repayment plan with lenders, usually over a period of three to five years.

If you are considering filing for bankruptcy, know that choosing either option will significantly affect your credit score.

Chapter 7 bankruptcy remains on your credit report for a decade and chapter 13 will linger for seven years. After filing, expect to encounter problems obtaining new lines of credit.

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Limited debt management options push Americans toward bankruptcy