These are tough financial times
You may be facing insurmountable debt, the danger of losing your home or car, and continual harassment from debt collectors. Your struggles may be compounded by divorce, the loss of a job, uninsured medical expenses, or a combination of unexpected events. If you are in extreme financial distress, a quick payday loan clearly is not going to go the distance. But you know you need to do something.
Is bankruptcy the answer?
The two most common types of bankruptcy for individuals are Chapter 7 (where you can get rid of certain types of debts altogether) and Chapter 13 (where you can pay all or, more frequently, a portion of your debts according to a court-approved payment plan). To file under Chapter 7, your average monthly income for the six months immediately preceding the bankruptcy filing must not exceed the median income in your state. Alternatively, you may file under Chapter 7 if your income is insufficient (after subtracting certain expenses for basic necessities) to repay any part of your debts.
Ask an attorney
Determining whether you are a candidate for bankruptcy and whether filing for bankruptcy would be in your best interest requires in-depth legal analysis. Before you make a decision, be sure to get legal advice from an experienced and reputable bankruptcy attorney.
Chapter 7 debt liquidation
A Chapter 7 bankruptcy allows you to get rid of certain types of unsecured debts while keeping your exempt property. In many cases, you can keep all your property. Among the kinds of unsecured debts you may include are credit card balances, personal loans, debts remaining from repossessed property, utility bills, and medical bills. In some cases, you also may be able to discharge old income and property tax debts. Chapter 7 bankruptcy may be an effective alternative if you own little property and have an unmanageable amount of debt. Unemployment, unexpected medical expenses, and divorce are some of the things that can precipitate a Chapter 7 bankruptcy.
Chapter 13 debt adjustment
If you do not qualify for Chapter 7 and you have a regular income, you may be able to file a Chapter 13 bankruptcy. Chapter 13 involves a three- to five-year court-approved payment plan to pay your debts, or a percentage thereof, in an affordable manner. Chapter 13 may be an option if you are behind on your car or house payments and want to avoid a repossession or foreclosure. Or it may provide a manageable way to pay debts that you cannot get rid of in bankruptcy, such as taxes, child support arrearages, and divorce debts. Chapter 13 may also allow you to keep valuable assets that you would have to surrender under Chapter 7.
Life after bankruptcy
Although bankruptcy is designed to give you a fresh start on finances, it will have a negative impact on your credit rating and can remain on your credit report for up to ten years. But if you are a candidate for bankruptcy, you are probably deeply in debt and behind on your payments. As a result, your credit score is probably very low already. Improving your income-to-debt ratio by reducing your debt load can be the first step toward improving your score. Even if you have a perfect payment history, if you have more debts than you can pay using your income, you will have a poor credit rating and bankruptcy may actually be a positive turning point in your credit history.
If bankruptcy isn’t for you, read about other options in What Should I Do | Debt-Relief Options.
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