Many people regard bankruptcy as a scary proposition. It can be difficult to admit that you need help getting out of a nerve-racking debt. Gossip columns are always discussing the latest stories about celebrities who can't manage their money wisely and have to sell property - or, like Mike Tyson, to part with expensive pets. After all, we live in an economy in which people get dozens of credit card offers every day. Having debt has become an accepted norm. But how can you tell that it's time to evaluate your financial situation and file for bankruptcy?
Bankruptcy offers a fresh start for people who have financial troubles and can't fulfill their financial obligations. They receive a discharge - a court order that says they don't have to pay off certain debts.
Federal bankruptcy law contains several different chapters governing specific types of bankruptcy proceedings. A consumer, or non-business debtor, can file for bankruptcy under either Chapter 7 or Chapter 13.
Chapter 7 is sometimes considered as a "straight bankruptcy." The proceedings involve the complete liquidation of the debtor's estate. It means that your house and nearly all other assets will be sold to repay your debts. That's why Chapter 7 is not a good choice if you own a company, a family home, or any other personal assets which you want to keep.
Chapter 13 is known as a "reorganization bankruptcy" or a "wage earner bankruptcy." It enables people to pay off their debts for up to five years. If you have property you don't want to lose, filing a Chapter 13 bankruptcy may be a better option than Chapter 7. You may continue working and paying off your debts over the coming years, and still keep your possessions and property.
Both types of bankruptcy can help you get out of unsecured debts and stop foreclosures, garnishments, repossessions, and debt collection activities. However, keep in mind that personal bankruptcy doesn't erase child support, alimony, taxes, fines and penalties of government agencies, some student loan obligations, recent large purchases and fraudulent debts.
There is no magic formula for deciding when bankruptcy is necessary. After all, it is not a simple cure for out-of-control debt. Most people declare bankruptcy due to unemployment, large medical expenses, seriously overextended credit, and marital problems.
Consider bankruptcy if you:
- can't make regular timely payments on your bills,
- can't get out of debt within five years,
- are getting notices that your mortgage or loans are being foreclosed,
- have had a severe financial setback, for example a divorce or a costly illness,
- use your credit cards to pay for necessities.
Keep in mind that bankruptcy information will stay on your credit report for 10 years. It can knock your credit score down into the lowest rankings. Potential lenders will consider you as a high risk, so it can be difficult to get approved for a credit card, buy a home or get life insurance.
If you want to avoid declaring bankruptcy, give your financial situation a little more thought. Try to negotiate with creditors and reduce your monthly payments or get help from nonprofit credit counselors and design a repayment plan.
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