They are not telling you the truth about bankruptcy.

The people who do not want you to go bankrupt — the credit card companies, the banks, and anyone engaged in collections — have done a good job of making the process sound onerous and very damaging to your financial life.

This does not match my experience. I have talked to many people about their experiece with bankruptcy and have been able to follow three close friends through the process. All of them have generally found that they were able to discharge debts they could not handle, put their financial lives in order and, sooner than they expected, their credit improved enough so that they were able to borrow money and even get credit cards.

Bankruptcy is also very useful for foreclosure prevention — even if the auction date has already been set! But so far judges are limited as to what they can do with the mortgage. They can stop all interest and late payments on your delinquent amounts, and set a payment plan for the back debt you can live with, but they cannot cut future payments. That often means you lose the house in the end.

However, Congress is now considering legislation that would allow bankruptcy judges to “cram down” the mortgage balance, setting it at a number that produces payments you can afford. We have written about this before. It is still in the works. We strongly support this legislation but the lenders are bringing up their big guns to shoot it down. If you think it’s a good idea, let your Congressman and Senator know.

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