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Guide to Bankruptcy

If you are completely overwhelmed by debt and have run out of options, you may need to consider filing for bankruptcy. Bankruptcy is very serious and should only be a measure of last resort. Here are some things to consider before you decide to file:

Have you exhausted all of your options? Have you looked at all the ways you can cut expenses? Are there other ways to increase your income; perhaps getting a second job? Have you tried to negotiate with creditors to reduce your outstanding debt? Debt settlement is an effective way to reduce your debt and is much less damaging than bankruptcy.

A bankruptcy listing will severely tarnish your credit. As a result, you will have a difficult time getting credit. And if you do, you will be paying a much higher interest rate. You may also be faced with higher insurance premiums and may have a difficult time renting a house or even getting a job.

If you have assets, creditors can sue you and take them. Judgments last for 10 years and can be renewed for 2 additional 10 year periods.

Bankruptcy will not relieve you of secured debt, like a mortgage or auto loan. It also won't relieve you of most student loans, child support, alimony or taxes. Bankruptcy will only apply to unsecured debt, such as credit cards and medical bills.

A Chapter 7 Bankruptcy stays on your report for 7 to 10 years and a Chapter 13 stays on for 10 years from the date of closing. Chapter 7 requires the sale of nonexempt assets to reduce unsecured debt. The remainder of your unsecured debt will be excused. What's considered exempt varies from state to state. You are allowed to keep your retirement accounts, and most people retain possession of a car and their home if they keep making payments on them. If your income exceeds the median for your family size in your state and the means test says it's sufficient to make payments on your debt, you will be directed to file Chapter 13 instead. Under Chapter 13, you keep your property and agree to a three- or five-year repayment plan for some of your debt. If you follow the plan, the remainder of your unsecured debt will be eliminated. Chapter 13 is generally the better option if you've fallen behind on house payments because the plan allows you to catch up.

If it will take you more than five years to pay off your unsecured debt, then bankruptcy may be your best option. If that is the case, here are some steps to take to make things go as smoothly as possible.

Hire a reputable attorney.

  • The 2005 bankruptcy law increased the amount and complexity of paperwork, including a "means test," needed to file.
  • Gather documents. When you meet with the lawyer, you will need pay stubs, deeds, vehicle titles, tax returns and letters from collection agencies, among other paperwork. Your list of creditors must be complete.
  • Get credit counseling from an approved agency at least 180 days before filing. The law requires potential filers to meet with a counselor beforehand to evaluate if there are any other viable options.
  • Don't run up your credit cards right before filing. Bankruptcy courts consider that fraud, and you'll end up having to pay what you owe on the cards.
  • Don't deposit your money with the banks that issued your credit cards. Banks typically have the right to seize other funds on deposit if a credit card account becomes delinquent.

After you file, an "automatic stay" stops all collection activity including law suits and garnishments. The stay is temporary for secured debt, so you need to make payments or face repossession or foreclosure. You'll attend a creditors meeting (creditors rarely attend), where a trustee will finalize your case. You'll be required to attend a finance management course.

Take these steps as soon as possible after you file:

  • Start to build your credit score by getting a secured credit card. Stay under 20% of your available credit each month and pay your balance in full. After a year, apply for a regular credit card.
  • Order your credit reports from the three credit bureaus. Make sure the reports say your debts have been "discharged in bankruptcy."
  • Obtain an installment loan as a way of rebuilding credit, but prepare to pay a very high interest rate.
  • If you have student loans, try to pay more than the minimum required each month.
  • Don't co-sign for a loan. You are trying to rebuild your credit. You can't take the chance of someone else's bad credit bleeding onto your already struggling report.
  • If you intend to keep your car, sign a reaffirmation agreement with your lender.
  • Manage your finances wisely. Multiple bankruptcies are possible but are disastrous to your credit.