A. Bankruptcy in America: The Big Picture

Although you may not care much about the larger bankruptcy picture, understanding it will help you keep your situation in perspective. Knowing that you're not alone should also reassure you if you are feeling isolated or even like a failure.

Why People File for Bankruptcy

Studies show that the most common reasons for filing for bankruptcy are:

• job loss, followed by an inability to find work that pays nearly as well
• medical expenses that aren't reimbursed by insurance or government programs
• divorce or legal separation, and
• small business failures.

Of course, none of these events would necessarily require bankruptcy if the people who experience them had adequate savings to weather the storm. But, for a number of reasons, most of us lack such savings. In fact, many of us are up to our eyeballs in debt, making ends meet from paycheck to paycheck. And when a recession hits, or jobs leave the country en masse and the pink slips start flowing, many otherwise stalwart citizens find themselves turning to bankruptcy for relief. Let's take a closer look at how we got so financially overextended.

Why You Shouldn't Feel Guilty About Filing for Bankruptcy

The American economy is based on consumer spending. Roughly two-thirds of the gross national product comes from consumers like us spending our hard-earned dollars on goods and services we deem essential to our lives. If you ever had any doubt about how important consumer spending is to our economy, remember that President George W. Bush wasted no time after the events of September 11, 2001, in urging Americans to spend more. And many other government leaders told us that spending was our patriotic duty. As Americans, we learn almost from birth that it's a good thing to buy all sorts of goods and services. A highly paid army of persuaders surrounds us with thousands of seductive messages each day that all say, "buy, buy, buy."

These sophisticated advertising techniques (which often cross the line into manipulation) convince us to buy. And for those of us who can't afford to pay as we go, credit card companies are relentless in offering credit to even the most deeply indebted of us. In fact, billions of credit card solicitations are mailed to U.S. residents each year -- roughly ten solicitations for every man, woman, and child. And, perhaps surprisingly, the largest growth sectors for credit cards are college students and people with bad credit ratings. The college students are targeted because they are customers of the future -- and because their parents can be expected to bail them out if they get carried away with their new purchasing power. And people with bad credit are solicited in large numbers because creditors have discovered that they will pay huge interest rates for debts run up on their cards, which leads to equally huge profits.

Readily available credit makes it easy to live beyond our means and difficult to resist the siren songs of the advertisers. If, because of illness, loss of work, or just plain bad planning, we can't pay for the goods or services we need, feelings of fear and guilt are often our first responses. But, as we've also seen, the American economy depends on our spending -- the more, the better. In short, much of American economic life is built on a contradiction.

In this age of billion-dollar bailouts for poorly managed financial institutions, should you really feel guilt ridden about the debts you've run up? That's something only you can decide, but remember that large creditors expect defaults and bankruptcies and treat them as a cost of doing business. The reason banks issue so many credit cards is that it is a very profitable business, even though some credit card debt is wiped out in bankruptcies and never repaid.

Bankruptcy is a truly worthy part of our legal system, based as it is on forgiveness rather than retribution. Certainly, it helps keep families together, frees up income and resources for children, reduces suicide rates, and keeps the ranks of the homeless from growing even larger. And, perhaps paradoxically, every successful bankruptcy returns a newly empowered person to the ranks of the "patriotic" consumer. If you suddenly find yourself without a job; socked with huge, unexpected medical bills you can't pay; or simply snowed under by an impossible debt burden, bankruptcy provides a chance for a fresh start and a renewed, positive outlook on life.

What About the Downside?

Bankruptcy can also have its disadvantages -- economically, emotionally, and in terms of your future credit rating. The bankruptcy process can get intrusive. As part of your public filing, you are required to disclose your financial activities during the previous year or two, as well as your debts and current property holdings.

Bankruptcy also carries a certain stigma. (Otherwise, why would we spend so much time talking you out of feeling bad about it?) Some people would rather struggle under a mountain of debt than accept the label of "bankrupt."

If you have a bankruptcy on your record, you will need to convince those who have business dealings with you that you made every effort to meet your financial obligations before resorting to bankruptcy. Whether you are renting or buying a home, buying or leasing a car, or seeking financing for a business, your bankruptcy will be counted against you, at least for several years (and it will stay on your credit report for ten years). And while you will be able to get credit cards after bankruptcy, you will have to pay the highest interest rate, at least for a while.

While these facts may seem like downsides, they collectively have an upside. For several years, you will find it very easy to be debt-free -- you will have to pay as you go because it will be tough to get credit. Filing for bankruptcy can be a harsh wakeup call, one that will give you a new perspective on the credit system. A bankruptcy temporarily removes you from the credit hamster wheel and gives you some time and space to learn to live credit free (or, at least, to fashion a saner relationship to the credit industry).

Next: B. An Overview of Chapter 7 Bankruptcy

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