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New York bankruptcy may be better than insolvency

The Federal Reserve Bank of New York has filed a report that indicates that bankruptcy may not be the last resort many people make it out to be. Analyzing changes in bankruptcy law from 2005 onward, the Federal Reserve has concluded that people who file bankruptcy may actually be in a stronger financial situation than those who are forced by circumstances, finances or fear of the stigma associated with bankruptcy to face insolvency.

According to the report, one of the biggest bankruptcy misconceptions is that someone with a bankruptcy on their history cannot get credit. The reality is actually very different because people who filed for bankruptcy were actually better equipped to obtain more and better lines of credit than debtors who were barely able to make minimum payments on their outstanding bills. In addition, people who filed bankruptcy fared better when financing homes and vehicles than their insolvent counterparts.

Much of the fear of bankruptcy is driven by misunderstandings about how bankruptcy actually functions in law as well as credit consolidation companies who turn a profit on convincing debtors to avoid bankruptcy. While bankruptcy is not the perfect solution for every case, a person who works to avoid bankruptcy by making minimum payments at age 25 may lose $23,000 in retirement funds that could have been available otherwise.

When advising a client on what options are available, including bankruptcy, an attorney might begin by examining the amount and type of debt the client has amassed as well as what steps have previously been taken to avoid bankruptcy. The attorney may then draft a repayment or debt forgiveness plan to forward on to the debtor’s creditors for approval. If the plan is approved by the creditors, the attorney may request court approval.

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