A recent study conducted by economists from the Federal Reserve Bank of New York and Columbia University suggests that the costs associated with filing for personal bankruptcy could cause some people to become insolvent. The researchers looked at the impact that the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act has had on bankruptcy filings.
While the researchers say that the bankruptcy reform legislation has been good for credit card companies and other financial institutions, they believe that it has hurt low-income families. Although people with low incomes are often the most in need of debt relief, they are now much less likely to file for bankruptcy due to higher costs and more complicated requirements. After passage of the 2005 legislation, the average out-of-pocket cost of filing for Chapter 7 bankruptcy rose from $600 to $2,500, with an increase as well in the cost of filing under Chapter 13.
Even though bankruptcy can initially damage a person’s credit score, the overall effect is ultimately much more positive than going into insolvency. After debts are discharged in bankruptcy, an individual has an opportunity to rebuild credit. On the other hand, a person who is insolvent will continue to face collection attempts, wage garnishments and foreclosure notices with no hope of rebuilding credit.
Despite the short-term costs, an attorney may advise a person with overwhelming debt to file for bankruptcy rather than become insolvent. If an individual has few financial resources, an attorney may be able to assist in working out a plan for debt relief. Legal counsel may also be able to help those who have recently discharged their debts after filing for bankruptcy to develop a plan for rebuilding their credit.