We set a new record for personal bankruptcy filings in 2005, with a total of 2,039,214 consumer filings. That’s a 30% increase over the prior year. Of course, some of the surge has to do with negative publicity surrounding the new bankruptcy law that went into effect in October 2005. Approximately 400,000 of those cases were under Chapter 13, with the rest being Chapter 7 bankruptcies. It will be interesting to see the statistics later in the year, when we will have a better idea of the effect of the new law on the pace of filings, as well as its effect on the ratio of Chapter 7 to Chapter 13.

Lost is all this new data and hoopla over the bankruptcy law is a simple fact: Many of these bankruptcy filings were not necessary. I’m not talking about the usual media disinformation about “deadbeats” taking advantage of the system. That has proved to be a hollow and false excuse for passage of the new law. (See my March 20th post on this subject.) No, I’m talking about the reality that many people are FORCED into bankruptcy when they would truly rather avoid it. Consumers often get pushed headlong into bankruptcy by a combination of (a) predatory practices on the part of banks and financial institutions that profit from consumer indebtedness, and (b) aggressive collection tactics. The Federal Trade Commission logged more than 58,000 complaints last year about collection abuse. Since that is the barest tip of the iceberg (most people just take it and do not complain), is it any wonder that a consumer otherwise motivated to avoid bankruptcy is forced to it by abusive collection techniques? I’m not saying that the collection industry is evil. It provides a necessary function in our economy. Nor do I have anything against people who collect for a living, even though the industry has more than its share of bad apples.

My message here is simple. Bankruptcy can often be avoided by educating consumers about the option of debt settlement, especially the self-help variety, and by teaching them how to deal with collection tactics. I’ll discuss the problems of third-party professional debt settlement in other posts. For now, I want consumers to realize that avoiding a trip to bankruptcy court is simply a matter of (a) getting educated about how the debt collection process works, (b) developing a financial game plan that makes sense for your circumstances, and then (c) getting on the phone with your creditors with the goal of working things out amicably. It’s called taking responsibility and then taking action. It’s as American as apple-pie. It works, and the financial media is irresponsible for not discussing the most viable option of all for debt resolution. So get educated, take charge, and work things out. It really is that simple.