When Filing for Bankruptcy Is the Right Solution
We are often asked if filing for bankruptcy in Arizona is the right solution for me. Being in debt is a way of life for many Americans. This notion is further reinforced by the fact that debt levels have actually hit new highs. Take a look at the numbers:
- The Federal Reserve Bank of New York reported that overall household debt, which includes credit cards, student loans, and mortgages, was at $13.54 trillion in 2018. Credit card issues are on the rise with balances returning to their 2008 peak as well as more and more subscribers guilty of being at least 90 days overdue.
- Credit bureau Experian identified personal loans, often used in debt settlement, to be the fastest-growing kind of debt, totaling to $291 billion in 2018, a new record. One in 10 adult Americans has taken out a personal loan.
- According to mortgage buyer Freddie Mac, mortgage refinancing cash-outs have also regained popularity. Borrowers take out a larger loan to pay off their mortgage and cash out the difference, usually to pay off other debts or current bills. These cash-outs make up 83% of the conventional refinance loans taken in the final quarter of 2018, the highest since 2007.
Greater Risks than Rewards
The data demonstrate measures more desperate than strategic. As Americans try to get themselves out of the hole through retirement plan loans, mortgage refinancing cash-out, and debt consolidation loans, they only manage a short-lived reprieve. In fact, they end up burying themselves deeper in debt in the process.
The Danger of Debt Consolidation
It may seem sensible to pay off a high-rate debt with a lower-rate loan, but you have to read the fine print as well as whatever’s indicated between the lines. These low-rate loans often come with caveats in hidden costs and other drawbacks.
Financial psychologists warn against debt consolidation in particular since it creates a false sense of security. It feels like the debt has been settled and usually leads to the wrong idea that it’s safe to start spending again. Many take this route until they no longer have any wiggle room left.
Debt consolidation can also be radically ineffective. It can’t be the answer if the main problem is that borrowers are easily lulled into the illusion that they are free to keep on spending.
The Backlash of Home Equity Borrowing
The drawbacks in cash-out refinancing and other home equity loans are significant. Instead of having equity to use for building wealth or covering emergencies, the borrower is left without this resource. The debt relief provided by these loans is but temporary, especially since many are mired in a culture that encourages racking up debt.
Take note as well that, with these loans, borrowers turn their unsecured debt, which could be erased in bankruptcy, into secured debt, which not only persists but may even put their homes at risk of foreclosure.
The Real Deal with Retirement Plans
Retirement plan loans may seem like a safe route, but there are very distinct hazards as well. The consequences of late payment – the penalties and taxes, as well the loss of the earnings of the borrowed sum from future tax-deferred returns – are quite severe. One study shows that 86% of people who quit their jobs with outstanding retirement loans ended up defaulting on their debt.
It would have been preferable to opt for an unsecured personal loan if only lower interest rates were truly available. Often, low-interest rate offers are nothing more than deceptive marketing or outright scams. Borrowers end up facing steep fees or high-interest rates and wind up with bigger debt in the long run.
Most of the time, the solution isn’t found in a loan. Financial literacy experts point to the following as better options:
- Cutting down on living expenses by being more frugal.
- Boosting income with side jobs.
- Taking advantage of debt management plans and hardship programs.
- Filing for bankruptcy.
Qualifying for Bankruptcy
Borrowers who are truly overwhelmed should consult a bankruptcy attorney as early as possible to determine if they qualify. Ideally, steps should be taken before failing to make payments. Financial problems, after all, don’t start at the first missed payment. See if you can declare bankruptcy before things go from bad to worse.
If you find yourself in financial distress, talk to a bankruptcy lawyer before you actually start skipping payments. Contact Pew Law to request a free consultation.