When to File Bankruptcy

Knowing when to file bankruptcy is a difficult decision.  Filing bankruptcy may or may not make sense for your personal situation, depending on a variety of factors. Bankruptcy is a legal process that may be a last resort when you have more debt than you can realistically repay. While it may seem like a free pass to get out from under a mountain of debt, the truth is you will often find the process as grueling as continuing to repay your debts without filing for bankruptcy.

When to Consider Bankruptcy
The decision to declare bankruptcy is one of the most important financial decisions someone makes. It's a decision influenced by the debt you've accrued and your ability to meet ongoing payments or pay the full amounts. While bankruptcy is often precipitated by nagging creditor telephone calls, you shouldn't declare bankruptcy merely to avoid those calls. While filing bankruptcy will stop those calls temporarily and stops your creditors from pursuing litigation against you, secured creditors can seek relief from bankruptcy's automatic stay and continue to pursue you for payment, repossession or foreclosure.

The bankruptcy process discharges-that is, erases or wipes out-certain debts. However, bankruptcy only discharges most of your unsecured debt, which is debt for which there is no property for a creditor to take, such as credit card debt and medical bills. Secured debts involve property that a creditor can take, such as mortgages and car loans. Your car or your home still might be repossessed or foreclosed if you can't make the payments.

It's also important to understand that certain unsecured debts are not discharged during your bankruptcy, such as student loans, alimony, support obligations, certain forms of restitution and debts you may have incurred through fraud. Bankruptcy will also ruin your credit, ensure you have only the highest interest rates on new credit cards and loans, ensure higher insurance premiums and make it exceedingly difficult to rent an apartment. Also, depending on the sort of bankruptcy you file for, the bankruptcy will stay on your credit report for 7 to 10 years. In short, if you won't be any better off after filing for bankruptcy, it makes little sense to do so.

Finally, it's important to understand that filing for bankruptcy isn't necessarily a dishonorable thing to do. Most bankruptcy filers do so because they found themselves in a financial hole after a divorce, the loss of a job or outrageous medical bills rather then rampant overspending and poor financial management. Most bankruptcy filers have no other alternatives.

The Bankruptcy Process
There are two types of personal bankruptcy. Chapter 7 bankruptcy means the sale of your nonexempt assets to reduce your unsecured debt. The remainder of your unsecured debt is excused. While the definition of unsecured debt varies by state, you will generally be allowed to keep retirement accounts, your car and your home as long as you maintain your payments. Chapter 7 bankruptcies stay on your credit report for 10 years.

If your income is more than the median family in your state and a means test indicates that your income is sufficient to make payments on your debts, you may be required to file the second type of bankruptcy, Chapter 13. Under Chapter 13 bankruptcy, you will likely keep your property and enter into three- or five-year repayment programs in which to repay your debt. If you follow through with your repayment plan, the remainder of your unsecured debt will be eliminated. If you've fallen behind on your house payments or other secured payments, Chapter 13 may be the better option for you as it allows you to catch up on your debts. Chapter 13 bankruptcies stay on your credit report for 7 years.

Begin the bankruptcy process by filing a bankruptcy petition, which is a legal document requesting certain relief, with the Bankruptcy Court, which is a type of Federal Court. In that initial filing, you list all of your debts and property. Filing for bankruptcy initiates a stay, or a certain time period during which your creditors cannot attempt to collect from you absent seeking relief from the stay. At that point your creditors must make any claims against you in the Bankruptcy Court as part of the bankruptcy proceedings.

After filing, you'll need to attend a meeting of the creditors where a bankruptcy trustee will finalize your bankruptcy.

What Property You Can Keep
Bankruptcy proceedings will generally allow you to keep enough property to make a new start after bankruptcy. You can generally keep household furnishings, certain jewelry, clothing and tools. You can also keep a certain amount of equity in your house. You can also likely keep your car, depending on how much the car is worth and whether you still owe money on the car.

After Bankruptcy
After your bankruptcy is discharged, you need to rebuild your credit as quickly as possible. Start by getting a secured credit card or passport loan. Stay well below your available credit limit, and pay balances in full. Keep an eye on your credit reports and make sure they state that your debts were discharged in bankruptcy. Try to pay more than your minimum payment on student loans. Finally, manage your finances prudently. Don't cosign on a loan for someone else. Make your payments on time and in full.

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