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Avoiding bankruptcy might not be a wise choice

Nearly a decade after the bankruptcy laws were reformed in 2005, the Federal Reserve Bank of New York released its report on consumer bankruptcy under the more stringent rules.

Washington residents may be surprised to learn that, according to the report, consumers who filed for bankruptcy protection actually had more new lines of credit accessible to them than others who still struggled under their debt load.

The study focused on the financial straits of consumers who cleared the slate with bankruptcy versus those who remained insolvent but attempted to pay down their debts.

The research indicated that those who declared bankruptcy soon had a plethora of offers to re-establish credit. Approximately one year after filing, financing rates for automobiles drop precipitously. Mortgage rates followed suit within the following couple of years. Perhaps most surprisingly, credit scores of bankrupt consumers rose more than those of individuals still struggling over their debts.

The FRBNY found that the reforms had a negative impact on delinquent consumers and increased the probability of them sinking into insolvency. Those insolvent consumers who shun bankruptcy had higher stress levels related to finance than those who take the plunge.

Still on the fence? Consider that the money diverted to credit counselors or minimum payments could be better put to use in a retirement account, eventually building a tidy nest egg.

While consumer bankruptcy can't wipe out all debts -- you'll still be saddled with those student loans -- it can definitely lead to a rosier financial outlook for financially pressed Washington residents. To decide if it is the right approach for you, seek out qualified legal and financial professionals to discuss your options.

Source: Fox Business, "How Avoiding Bankruptcy Can Backfire" Steve Rhode, Mar. 02, 2015

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