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Is Bankruptcy the Right Choice?

Ask yourself if any of these statements apply to your current financial situation:

  • You feel overwhelmed with debt.
  • You are receiving constant phone calls from collection agencies demanding payments.
  • You receive overdue notices on a regular basis.
  • You are being threatened with garnishment of wages or foreclosure on your home.
  • Your monthly income is not sufficient to pay your monthly living expenses and bills.

If you answered “yes” to any or all of these statements, you may be considering filing for bankruptcy as a way to relieve your financial burden.

Filing for bankruptcy is a serious matter and one which should never be taken lightly. It is best to look at all the possible options available to you for debt relief and to seriously weigh the consequences of filing for bankruptcy. As with most all financial situations, there are both positive and negative aspects associated with bankruptcy. You should make every effort to understand the process and know how it will affect you and your personal financial situation not only in the short-term, but for many years to come.

The following suggestions should help you determine if bankruptcy is the right choice for your particular financial situation.

1. Take an honest look at your debt. This involves looking at all of your outstanding debt such as mortgage (or rent) payments, all regular monthly bills, all types of loans (personal, auto, student), and credit cards and balancing the total against your monthly income. You need to determine the ratio of debt to income. The important factor is percentages. Your outstanding debt may be enormous but if you also have a very high income it can greatly impact the ratio. Alternatively, if you owe a large amount of money to your creditors and have a relatively low income, you may not be allowed to file for a bankruptcy which restructures your debt.

2. Know which type of bankruptcy applies to you. There are two types of bankruptcy which are available to individuals. One is a Chapter 7. This bankruptcy cancels all debts which are not secured and are not exempt from discharge. You are allowed to retain any secured debt such as a car or home as long as you remain current with your payments.

The second option is a Chapter 13 bankruptcy. In this scenario, your debts are restructured but not eliminated. Normally all of the debts are consolidated (at lower amounts) and you make one monthly payment (to a Trustee) for approximately 3-5 years. You are allowed to keep your home or car as long as you make regular payments and do not become delinquent on them. To file a Chapter 13 bankruptcy you must satisfy the Court that you have the income necessary to successfully pay the restructured settlement agreement (monthly payments).

Your personal financial situation is what determines which type of bankruptcy you may file. Again, the debt to income ratio is the most important factor.

3. Consult with a bankruptcy attorney. For a small fee, most bankruptcy lawyers will meet with you and provide you with important information including your state's current laws regarding bankruptcy. This is also an opportunity for you to ask questions and give a quick overview of your situation to the attorney.

4. Realize that losing your home or possessions is always a possibility. Depending on the amount of equity in your home mortgage, your car, or your possessions, the court can direct that these items be sold and the profits used to pay off your creditors. Only you can determine if this is a chance you're willing to take. If you do have a lot of valuable personal property, you might consider selling some of it outright and using the proceeds to pay off your debt before making the decision to file for bankruptcy.

5. Understand what bankruptcy can do. Bankruptcy can do the following:

  • Stop wage garnishment by your creditors.
  • Stop repossession of a car or other personal property.
  • Stop foreclosure process on your home.
  • Stop creditors from contacting you (by phone or written notices).
  • Absolve you from legally paying all or most of your outstanding debts.

6. Know what bankruptcy can't do. Bankruptcy cannot do the following:

  • Eliminate certain secured debt. A home mortgage or car loan cannot be discharged. You must personally negotiate with these creditors and arrange a payment schedule.
  • New debt is not covered. You are legally liable for all new debt which you incur after the bankruptcy is discharged.
  • Certain debts are never discharged. These include student loans, any unpaid State or Federal taxes, alimony, and child support.

7. Be aware of how bankruptcy influences your credit. A bankruptcy will generally stay on your credit report for seven to ten years. Your credit score will definitely take a hit but over time, it is possible to re-establish your credit and improve your credit score. Initially you can expect to pay higher than average interest rates on any loans or credit cards. Most people who file for bankruptcy appreciate the fresh financial start it allows and come away with better spending habits and a new-found commitment to smart money-management.