Your bills keep coming, your fees keep mounting and your creditors keep calling. What can you do? Your finances have become unmanageable, and you’re desperate to get out of debt.
Should you file for bankruptcy?
It depends on the seriousness of your situation and the range of other options available to you. For while bankruptcy can get you out of debt, it will have a profound effect on your financial well-being for years to come.
Bankruptcy is a legal process through which a debtor is “discharged” from personal liability for certain types of debts (i.e. you’re no longer required to repay the debts that have been discharged). Once those debts are discharged, your creditors aren’t allowed to take further collection actions such as foreclosures, repossessions, wage garnishments and collection calls.
The two primary areas of bankruptcy law used by individuals to discharge personal debt are Chapter 7 and Chapter 13.
Chapter 7 is the least favorable to the debtor, and involves the sale of all your “nonexempt” assets by a court -appointed trustee, with the proceeds going to your creditors to pay their claims. Exempt assets vary from state to state, but usually include cars, work-related tools and basic household furnishings.
Chapter 13 is a much more debtor-friendly option available to people with a steady income. It allows you to propose a court-monitored three-to-five year repayment plan, through which you can pay off your debt with future earnings instead of through the sale of your current assets.
The major downside of personal bankruptcy is the negative effect it has on your overall financial profile. A Chapter 7 bankruptcy will remain on your credit report for 10 years, limiting your ability to buy a home, get a consumer loan, get life insurance or secure certain jobs.
In addition, bankruptcy does not eliminate your need to repay overdue taxes, spousal or child support, student loans, forfeitures, or criminal fines and penalties.
Given its long-term implications, bankruptcy should be your last resort. Reduce your personal spending, and negotiate with your creditors. In today’s financial environment, most will be willing to work with you.
If you decide that your debt problems warrant this approach, be sure to hire a lawyer well versed in bankruptcy law.
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