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When Is Bankruptcy the Right Decision?

Aug 17, 2007
Sounds painful, doesn't it? Filing bankruptcy is not and should not be an easy choice.

However, you need to be careful about when you file. Bankruptcy or even just starting to file for bankruptcy will impact your credit for years.

Yes, you read that right, starting to file for bankruptcy and then changing your mind will impact your credit history. So be certain first that it is something you need to go through. Don't get things started and then realize you didn't need to do it after all. There's no need to take that kind of hit to your credit score.

A bankruptcy will clear most of your debts, but some kinds of debts will not be cleared, and you will still need to pay them. In recent years it has been made more difficult to file for bankruptcy, and you are left responsible for more of your debts in many cases, even unsecured debts such as credit cards. If it is possible for you to pay back your debts on your current income, you may be required to do so under current bankruptcy laws.

Bankruptcy means that you will lose many of your assets, so as to pay back as many debts as possible. You will be allowed to protect a certain amount, but not everything. The amount you are allowed to protect depends upon the state you live in.

With bankruptcy being harder to file, you need to be sure that you will benefit. Being freed from the constant calls from creditors is a wonderful thing, but if you are going to be responsible for all your debts anyhow, there is little reason to file for bankruptcy. You may be better off negotiating a manageable repayment schedule.

Chapter 13 is popular for individuals because it gives a repayment plan, so that you can protect more assets. Depending on what you earn, you will be given a 3-5 year repayment plan. Chapter 13 has the advantage that you don't necessarily lose your home, so long as you can continue to make mortgage payments and make up the missed ones.

Chapter 7, on the other hand, requires liquidation. It's a much less pleasant option for most people. How much you can protect depends on where you live, and how far you need to liquidate may depend on the debts you need to repay.

Do everything you can to estimate the benefits you may receive by filing bankruptcy. You need to know that you will receive the relief you expect. It is far better to check beforehand than to change your mind halfway through, failing to get the relief from bankruptcy, yet still suffering the consequences in your credit history.
About the Author
Stephanie Foster blogs at http://credit-blog.findcreditonline.com/ about credit and money issues. If bankruptcy is not the right solution for you, she suggests you consider debt consolidation .
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