We got an e-mail today with the subject line of “Bankruptcy will get your finances back on track.” People think that a bankruptcy will cleanse them of their debts. That is a myth, and let me explain why.

Yes, it’s true that a Chapter 7 Bankruptcy will release a debtor of all debts. The problem is that the bankruptcy laws were changed in 2005. This law makes it much harder to file a Chapter 7 bankruptcy. Now the judges have to steer debtors towards a Chapter 13. What does a Chapter 13 bankruptcy mean?

It means that a debtor will have to repay part (if not all) of their debts. In addition, the debtor has their finances managed by the bankruptcy trustee. And, the debtor has to pay that trustee. If a person just stops paying their debts, then they can actually pay less money than they would with a Chapter 13 bankruptcy. Fortunately the laws are written in your favor. The debt collection process is tough. Most big companies don’t have the stomach to do the hard work of collecting money. That is why they farm that hard work out to a collection agency.

What does the collection agency do? They just call the debtor over and over again. Very few collection agencies are going to do what is actually necessary to force the borrower to pay. And that is to file a lawsuit. If they ever do file a lawsuit, the court system is so backed up that it is hard to get a judgment. And what good does a judgment do them?

Statistics show that only 20% of all judgments ever get collected. Even if they attempt to garnish your wages, you can contest their garnishment. You can stop paying your unwanted debts, ignore the debt collectors, and in two to three years be back on track. At that time, you will be much better off versus a bankruptcy which stays on your credit for seven years.

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