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Determining whether or not to file for bankruptcy

A report about filing for bankruptcy has come out of recent research by two economists from Columbia University. The new study by the Federal Reserve Bank of New York identifies a section of financially struggling people who are too poor to file for bankruptcy despite the changes in the bankruptcy law in 2005.

According to the researchers, these people should have benefitted the most from the relief offered from personal bankruptcy. Unfortunately, that didn’t happen and the bankruptcy abuse prevention and consumer protection act actually diminished their chances of making a fresh start. These people, as the report suggests, are placed in the lowest on the income distribution chart and have less access to new lines of credit. Those who manage to file for bankruptcy may witness a rise in their credit scores, but the same doesn’t happen for these people.

Only those people who have access to better credit may file under Chapter 7. For these people, insolvency may be the only way out. However, both bankruptcy and insolvency are forms of default, and people who avail themselves of a debt discharge through bankruptcy may still be in a better financial position than those who become insolvent. The changes in the bankruptcy law made filing under Chapter 7 more expensive and the process more complicated. The findings of the study suggest that this was one of the major reasons behind people declining to file for bankruptcy.

The changes in the bankruptcy law were brought about after it was found that many people deliberately abused the bankruptcy process by filing under Chapter 7 when they could have repaid some part of their debt over time. The challenge now will be to convince financially struggling people to seek options that would benefit them in the long run.

Source:¬†WSJ.com, “Too Poor to File (for Bankruptcy),” Katy Stech, April 14, 2015

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