Bankruptcy facts, consequences

The American Financial Services Association, a national trade association for market-funded providers of financial services to consumers and small businesses, provided the following information. AFSA is based in Washington, D.C., and was established in 1916.

A fresh start

A steady increase in bankruptcies began in 1980, largely as a result of the Bankruptcy Reform Act of 1978.

This was the first major revision to the bankruptcy laws since 1938 and was introduced to ensure that the debtor had enough property to begin again, making it easier for him or her to resume a normal role in society.

While the law was enacted to help people truly in financial distress, unfortunately there are people who see bankruptcy as a way to reduce or eliminate their debt burdens.

According to the United States Bankruptcy Courts Web site, the primary purposes of the law of bankruptcy are: "to give an honest debtor a fresh start in life by relieving the debtor of most debts, and to repay creditors in an orderly manner to the extent that the debtor has property available for payment."

When is bankruptcy necessary?

Because of its legal and financial consequences, bankruptcy should only be considered in extreme situations. Bankruptcy remains on a consumer's credit record for up to 10 years. Because of this, obtaining loans for a home, a car, education, or a business venture may be very difficult. It may also hinder day-to-day living standards by making it difficult to acquire necessary items.

Most creditors will not open an account for people who have declared bankruptcy, and the ability to obtain a credit card also is diminished. A blemished credit record may lead future employers to question responsibility, and make it difficult to find rental housing.

The large number of bankruptcy filings affects even credit-responsible persons through the financial services lending practices. Lenders are in the business to make a profit, so when they lose money from people who default on their loans, lenders have no choice but to try and cover their increased costs. This often means increasing credit charges, cutting back on granting credit to consumers with less than perfect credit histories, tightening credit requirements and requiring collateral on larger loans.