DOOR NUMBER TWO: BANKRUPTCY
This is the "end of the line" for the debtor who is drowning in debts. Bankruptcy is the ultimate trump card. A declaration of bankruptcy forces all commercial creditors to cease and desist from attempting to collect the debts owed them; it stops wage garnishment, reverses judgments, and generally wipes out the debts, depending on which form of bankruptcy is declared.

Frankly, for some people, bankruptcy is the only realistic option. If you owe $50,000 in debts, and you'll never earn more than $ 1,000 per month, then you're broke! The sooner you face the music and wipe out the debts, the sooner you'll have a fresh start. Judging by the record number of bankruptcy filings during the past few years, this is a very popular option among consumers. In fact, so many people have filed personal bankruptcy lately - more than 1.4 million in 1998 alone - that Congress is considering legislation that will make it tougher to take this option.

There are two forms of personal bankruptcy: Chapter 7, usually called "straight bankruptcy," and Chapter 13, usually called "consolidation bankruptcy" or "the wage earner's plan."

We're not sure why anyone would ever want to file a Chapter 13 bankruptcy, since under that approach you end up paying back most of the debts over a three to five year period anyway, plus you have the bankruptcy on your credit history for ten years.

Granted, there are certain unique circumstances that would point a person toward a Chapter 13 type of bankruptcy, but the majority of people file the Chapter 7 bankruptcy.

Basically, the way a Chapter 7 works is that certain personal property is treated as "exempt," meaning your creditors cannot touch that property when attempting to recover the money you owe them. An automobile, a certain amount of home equity, personal effects like clothing, and some other assets, are usually considered exempt, although the exact details vary from state to state. Any property that is not exempt is liquidated and distributed to the creditors under the supervision of the court. Since most people entering bankruptcy have only exempt property anyway, there's usually nothing left to distribute, so the creditors typically get nothing.

Unfortunately, it is too easy to file bankruptcy in this country. Many people mistakenly view it as a free lunch. There are HIDDEN COSTS associated with bankruptcy that make it a very bad solution for most people. (The cost of filing bankruptcy itself is minimal. Depending on what state you live in, and depending on how much your attorney charges to perform the service, you can expect to pay anywhere from $300 on up to $1,500 for the whole process.)

So what are the hidden costs? Simple: You'll pay through the nose for important purchases that you make later in life. The bankruptcy stays on your credit file for ten years.

Let's say you want to buy a house three or four years after having filed bankruptcy. If you're in good enough shape at that point to qualify for a mortgage, you'll be able to buy the house easily enough. The problem is that you'll pay a higher interest rate than the average consumer who has never filed bankruptcy.

Let's look at the numbers. Assume you buy a $200,000 house a few years after filing bankruptcy, and you make a $20,000 down payment. If you obtain a loan at 9.0% interest on the resulting $180,000 mortgage, versus 7% for an individual with clean credit, you might think that the extra 2% interest is not too bad a sacrifice for having filed bankruptcy in the past. Wrong! That extra 2%, over the life of a 30-year mortgage, will increase your monthly payment from $1,198 to $1,448, and the total of your payments will be more than $90,000 higher!

As you can see, bankruptcy is not a free lunch. It can be a very, very expensive lunch. Still, it may indeed be the best solution to your particular problem. If you have no choice, then you should proceed with a clear conscience. But the majority of people who take this option really don't know what they're getting themselves into. They are desperate, and they get talked into filing bankruptcy without understanding the hidden costs in their financial future.

We'll end this subject by offering three insights that we''ve gleaned from years of professional experience:

• Most personal bankruptcies are completely unnecessary, since there are usually better options available.
• Many consumers are forced, against their wishes, to file bankruptcy to protect themselves from aggressive creditor tactics.
• Bankruptcy still means FAILURE to most people.