Bankruptcy is a federal court process that helps individuals and businesses repay their debts incurred as a result of unemployment; large medical expenses, seriously over-extended credit, marital problems and other large unexpected expenses. Filing for bankruptcy provides you with an automatic stay that prohibits your creditors from taking action to collect the debt without the approval of the court.

There are two basic kinds of bankruptcy:

1. Liquidation or Chapter 7 Bankruptcy. Chapter 7 Bankruptcy refers to that chapter of the bankruptcy law under which an individual or company allows his assets to be sold off (liquidated) to pay creditors. It lets you eliminate (discharge) most of your debts in exchange for giving up property that is not protected by "exemption" laws in order to give you, the debtor, a fresh start. A bankruptcy trustee sells your property and distributes the money to your creditors. Any remaining unpaid debt is wiped out. If you don't have much property, you may get to keep what little you have. However, certain kinds of debts cannot be eliminated in Chapter 7 bankruptcy.

2. Reorganization or Chapter 13 Bankruptcy. Chapter 13 bankruptcy allows you to rearrange your financial affairs, repay a portion of your debts and put yourself back on your financial feet.
The objective is to give creditors a fair share of the money that you can afford to pay back. Under a typical plan, you make monthly payments to someone called a bankruptcy trustee, who is appointed by the bankruptcy court, for three to five years. The bankruptcy trustee distributes the money to your creditors.

Advantages and Disadvantages of Bankruptcy

Bankruptcy offers a number of advantages. It alleviates financial distress by pardoning or reducing your debt that was incurred from any number of circumstances such as illness or loss of a job. It can give you time to put your finances in order, and prevent dire circumstances by temporarily prohibiting creditors from seeking foreclosure of a home or repossession of a car. It can also temporarily prevent wage garnishment, debt collector harassment, and disconnection of utilities.

However, filing for bankruptcy can blemish your credit history, as it will be reflected in your credit record for 10 years. With your credit record tainted, it will be harder to purchase a car or buy a house. If applying for credit cards, you may be approved only for secured cards, or cards that offer higher interest rates. Given that bankruptcy is a notice of public record, it may be seen by potential employers, insurance companies, mortgage businesses, and other lenders.

You must also remember that bankruptcy does not discharge debts such as alimony and child support; most student loans; certain federal, state, and local taxes; debts from criminal activity; legal fines and penalties; and debts not listed on bankruptcy papers. Luxury purchases made within 60 days of filing are also not included.

Bankruptcy as Last Resort

Experts advise that bankruptcy should be resorted to only if you are absolutely unable to repay your debts and if you have exhausted all possible avenues.

Before filing for bankruptcy, try the following steps first:

• Contact your creditors and negotiate repayment terms
• Cease the use of credit cards
• Get on a debt management program
• Consolidate your debt

Consolidation loans are designed to help people pay off bills and pay down debt. It can leave you with lesser damage to your credit. Creditors may report your accounts as "slow pay" or "not paying as agreed", which will stay on your credit report for 7 years. With bankruptcy, it shows as a bankruptcy and stays on your report for 10 years. As a result, creditors will be leery in extending new credit to you.

Before you consider bankruptcy, be sure to contact us for a free debt consultation. We are here to help.