Personal bankruptcy continues to be a serious issue facing the U.S. economy as debt-strapped people turn to the U.S. Bankruptcy courts for financial relief from double-digit interest rates and mounting bills. If your outgo exceeds your income you might be thinking along the same path. But beware; bankruptcy is not all that it's cracked up to be. In fact, it could very well be the worst decision you have ever made depending upon your particular financial situation.
Before you even consider filing for bankruptcy you need to find out if your debts are even "dischargeable" under U.S. bankruptcy laws. You also need to consider what the financial costs of filing will be as well as the personal costs to your lifestyle and reputation. Do you want to remain responsible for your debts, but be able to stop the mounting interest so you can renegotiate your payment plan? Or do you want to simply walk away form your debt and start your life all over again?
Many people do not realize that filing bankruptcy may affect their ability to buy a home or even rent an apartment because a bankruptcy will remain on your credit report for seven to ten years depending upon circumstances. Will you be able to find a place to live after clearing away your debts? The time to find that out is before you file.
Bankruptcy can also affect you ability to earn a living. Many times potential employers will look at your credit report during the hiring process. Bankruptcy casts doubt upon your ability to manage finances and may even cause the employer to doubt your fidelity or honesty. You could lose out on a good position in that event.
One of the keys to determining which of the two types of personal bankruptcy is right for you is to understand the type of debt that you owe. "Secured debt" means that the lender has taken a lien against your property to help guarantee repayment. Secured debts usually include home mortgages as well as auto, motorcycle and boat loans. "Unsecured debt" is money that you owe on credit cards, utility bills and other signature-only debts. You will normally have to return any secured property to the lender when you ask to have secured debt dissolved by bankruptcy.
If you want to keep your home or car then you might want to look for another solution instead of bankruptcy. Often times you can contact the lender, explain your situation, and work out alternate payment plans and even reduced interest. The lender doesn't want to own your home or car, they just want their money.
Rarely does the bankruptcy allow a debtor to simply "walk away" from all of their debts. The court will usually have you turn over any cash that you have, sell any securities that you may own, and they can even require that you sell personal possessions regardless of their sentimental value.
Bankruptcy does nothing to correct behavioral problems. If your need to be relieved from debt is due to a catastrophe in your life like a serious illness, death of a spouse or business partner, or other unexpected financially devastating event, then bankruptcy might be called for. However, if the problem is simply that you do not manage your money and you spend more than you earn, then those same problems will simply reappear after bankruptcy unless you do something to make yourself change.
You should consult with an attorney or financial advisor before deciding. Generally, individuals file under either "Chapter 7" bankruptcy or "Chapter 13". "Chapter" refers to the section of the U.S. Bankruptcy Code that the filer is seeking protection under.
Chapter 7 is often referred to as "Straight Bankruptcy" or "Liquidation". Under Chapter 7 the court appoints a "trustee" to take inventory of your assets and property. The trustee takes whatever he or she thinks can be sold and raises money in an attempt to satisfy some or all of your debts. Depending upon which state you live in you may be able to keep some of your personal property and you may even be allowed to keep some or all of the interest in your home. After all of your assets are liquidated and distributed to your creditors the remainder of your debts are usually cancelled.
Chapter 13 is often called "Wage-Earner Bankruptcy" because it enables you to negotiate alternate payment arrangements with your debtors. You must have a steady paycheck or access to other recurring income in order to qualify for Chapter 13 bankruptcy.
Under Chapter 13 you present a payment plan to the court. If the court approves the plan a trustee is appointed to receive your payments and distribute them to the creditors. The expense of paying the trustee for his or her time comes from your pocket and that can be quite expensive.
There are certain debt limits that will make you ineligible for Chapter 13. Your financial advisor or attorney can tell you what the current limits are.
Chapter 13 is designed to help debtors who have a temporary financial emergency and who expect to be able to become financially solvent within a few years.
There are many legal and financial pitfalls involved in filing bankruptcy and there are many viable alternatives as well. Your best option is to seek competent financial counsel the moment that you believe that you will soon be unable to manage your debt.
Personal self control is a key to avoiding bankruptcy in the first place. If you don't run up a lot of debt then you won't be burdened by servicing that debt. If you can't afford to pay cash then maybe you don't really need whatever it is you're considering buying. Of course, few people can afford to buy a home or car for cash, but do you really need those new shoes, stereo, or fishing pole that you're about to plunk your credit card down to buy?