Cut Your Risk for Filing Bankruptcy

 On April 20, 2005, President Bush signed legislation into law making it more difficult for individuals to file bankruptcy under Chapter 7. Though the new legislation has found support from credit card companies and other lenders, when this new law takes effect in six months, many families will be disqualified from getting that "fresh start" provided for in bankruptcy law since 1898.

The intent of the new law is to protect lenders from the financially reckless and to encourage a greater degree of financial responsibility in consumers.  But have we really become a society of irresponsible spenders?

The number of people declaring bankruptcy has steadily increased over the past 30 years and shows no sign of slowing down.  Last year, for example, 1.5 million Americans filed for bankruptcy.   And certainly some of these were truly financially irresponsible, bringing themselves to bankruptcy by living beyond their means   But the surprising truth is that the majority of people who file bankruptcy are regular middle-class Americans who have suffered some type of life altering catastrophe.  According to a recent Harvard study, nearly 95% of those who declared bankruptcy did so due to a job loss, family break-up or medical crisis.
 
In many cases, job loss resulted in lost health insurance, leaving individuals and families exposed to high medical bills in case of injury or illness. If you had no choice but to pay for critical medical treatment on your credit card, wouldn't you do it?  Several senators attempted to pass amendments to the bill that would protect consumers if the bankruptcy was due to medical reasons.  Sadly, however, that amendment failed.

So, what can you do to protect yourself and your family?   Here are a few tips to avoid falling into the financial trap:

* Always have health insurance for you and your family. Even if you have to get a so-called "catastrophic" or high-deductible plan, it's crucial to be covered.  But try to limit your maximum annual responsibility for medical costs to $5,000 -$10,000.  You can find a variety of high-deductible health insurance plans in the individual and family health insurance market.  Check out www.ehealthinsurance.com for free quotes on plans in your area.
 
*Stay away from high interest credit cards.  According to the Harvard study, many of those who file bankruptcy due to credit card debt have paid off the original amount, but were dragged down by interest and fees. Often the fine print hides fees and information on interest rate hikes.  The new legislation doesn't outlaw fine print, so read it.

* Save for a rainy day.   Start an emergency savings fund to help you avoid going into debt to pay for unexpected bills.  Every little bit helps.

* Don't take out a second mortgage to pay bills.  Even under the new law, many states will consider your home a protected asset.  Which means a home may be safe from liquidation.  Research the laws in your state.

* Avoid gaps in health insurance coverage.  Consider a short term health insurance plan if you're in a transitional period.  Short term plans are typically very affordable and are designed to cover you from 1 to 12 months.  If you're changing jobs, getting married or graduating from college, it's important to avoid any gaps in coverage that might leave you open to financial difficulties.  Online health insurance agents, like www.ehealthinsurance.com are also a great resource for short term plans.