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Bankruptcy

Bankruptcy is a last resort when you are not able to pay your debt and all the other possible solutions have failed: you have already talked with your creditors and asked them if they were willing to negotiate better terms, lower the interest rate, and work out a modified repayment plan with you. You have already attended credit counseling sessions and received personalized advise on how to deal with your debt. You have determined that a debt management plan is not a viable solution for your financial situation, no other debt consolidation option is possible, and you don't want to take your chances with debt settlement.

What is Bankruptcy?

Bankruptcy is a federal legal proceeding in which you file a petition in court declaring that you are unable to make payments towards your debt obligations and therefore ask to discharge (wipe out) your debt. The court examines your income and assets and guides the process of liquidating any assets you own to pay off at least a portion of your outstanding debt by distributing the funds among your creditors. You can be ordered to pay a monthly sum for a few years to discharge debts. You will have to hire an attorney and pay both attorney fees and filing fees. Your credit will be ruined for 10 years, and it may be hard to get lines of credit or a mortgage in the future. In any case, bankruptcy does provide a way out of debt when there is no other solution.

What types of Bankruptcy are there?

There are two types of personal bankruptcy: Chapter 13 and Chapter 7. In 2005, the United States Congress changed the bankruptcy laws with the effect of giving more incentive to file for bankruptcy under Chapter 13 rather than Chapter 7, since the waiting period to get a discharge of your debt is now much shorter under Chapter 13 (as little as 2 years) compared to Chapter 7 (8 years).

Chapter 13: allows you to keep your property, provided you have sufficient income to fund a repayment schedule over 3 to 7 years.

Chapter 7: requires liquidation of all of your assets (with the exclusion of the ones that are exempt). Your property may be liquidated or directly turned over to your creditors.

Which debts can be eliminated with Bankruptcy?

Personal bankruptcy will cancel your unsecured debt (with the exception of student loans, which are difficult to discharge) and stop collection procedures, home foreclosures, utility shut-offs, vehicle repossessions, and wage garnishments. Bankruptcy usually does not allow you to eliminate your obligations in terms of child support and alimony, as well as taxes and fines due.

You are required to get credit counseling before you can file for bankruptcy.