Today the government announced unemployment figures for June that are much worse than expected. Employers cut 467,000 jobs and the unemployment rate rose to 9.5%, the worst since 1983. Unemployment is a lagging indicator, so even after the economy begins to improve, the jobless rate is likely to rise for some time.

With no end in sight to rising unemployment and with foreclosure rates continuing to accelerate, people are turning in droves to bankruptcy. You may find it humiliating even to consider bankruptcy, let alone join that crowd in the courthouse corridor, waiting for your name to be called. But with an economic tsunami rolling over your home, job, and health insurance, it just may be your best course of action.

The time comes when it makes sense to give up the good fight

Many people — honorable to the bitter end — struggle much longer than they should to rein in unmanageable debt. By the time they give up, they’ve lost valuable assets that would have been protected in bankruptcy, which defeats the “fresh start” purpose of the law. If you are a candidate for bankruptcy, the best time to file may be when you’re on the losing track but still have assets worth protecting.

It’s true that a bankruptcy filing remains on your credit record for up to ten years and makes it difficult to obtain competitive interest rates on loans. Most bankruptcy debtors, however, already have badly damaged credit records by the time they file.  When you are faced with insurmountable debt, a compromised credit rating can be a small price to pay for the fresh start that only bankruptcy can afford.

Before you decide to file, consult an experienced bankruptcy attorney

Bankruptcy is a significant and complicated legal proceeding. There is nothing to prevent you from representing yourself in bankruptcy court, but it is not wise to do so. When you represent yourself, you are held to the same standards of knowledge and practice as a licensed attorney. Knowing exactly how to navigate the intricacies of the Bankruptcy Code and several other bodies of statutory and common law is essential to an effective discharge of debts.

It costs nothing to get an initial consultation with an experienced bankruptcy attorney practicing in your jurisdiction.  It is vital that you receive competent legal advice before deciding whether bankruptcy is the right choice for you.

Looking at the numbers, bankruptcy may not be such a tough choice

An Associated Press analysis for the first quarter of 2009 revealed that U.S. bankruptcy filings were up an astounding 46% from March of 2008 to March of 2009. The jump is an even more dramatic 81% since March of 2007.  Some economists predict that the situation will become even worse.

A little over four years ago Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, also known as the 2005 Bankruptcy Amendment Act. Bankruptcy filings surged in the fall of 2005 to a record-shattering 2 million cases for the year as struggling consumers rushed to beat the implementation of the new law. In 2006, filings plummeted to 600,000. This year, bankruptcy filings are soaring again, and the predicted numbers for 2009 range between 1.5 and 1.6 million.

Elimination of debts in Chapter 7 may be an option even for higher incomes

The majority of bankruptcy debtors file under Chapter 7 which eliminates most (but not all) unsecured debts. When Congress enacted the 2005 Bankruptcy Amendment Act, it sought to restrict Chapter 7 filings by requiring debtors to pass a “means test” designed to weed out those who appear to have the ability to pay all or a portion of their debts under Chapter 13. Despite this hurdle, many people still qualify for Chapter 7 relief. Read Bankruptcy|What Should I Do?

The means test allows debtors to deduct certain expenses from their incomes. The greater the deductions, of course, the easier it is to qualify. Despite the congressional intent, the means test contains several variables that may enable people with higher incomes to qualify for Chapter 7. Debtors who own homes with mortgages may deduct the full amount of the mortgage. Having several children or dependants, multiple cars with loans or leases, high childcare and insurance expenses, and making large religious donations may also facilitate qualifying for Chapter 7.

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.