Factors to Consider When Considering Bankruptcy

Posted April 14, 2009 in Creditor/Debtor by

No matter how you look at, our economy is in the dumps and people are suffering. "Will I lose my job?" "Can I pay my bills?" "How can I ever afford to retire?" It wasn’t that long ago that people were flush with money. The stock market was rising, the real estate market was booming and jobs were plentiful. People were doing what people always do when they’re optimistic: Spending. Today almost everyone probably wishes they’d spent a little less money in recent years. I certainly wish I had more cash in the bank!

I read a news report recently that said the number of people filing for bankruptcy in the first three months of 2009 increased 35% compared to a year ago and 6% compared to the last three months of 2008. More than 300,000 people filed for bankruptcy in January, February and March. At that rate, it’s safe to assume that more than 1.2 million people will file for bankruptcy this year.

You may not be thinking about filing for bankruptcy, but someone you know may be considering it. With that in mind, here are a few things to know about bankruptcy.

Chapter 7 bankruptcy enables people to give their assets to trustee, who sells those assets and uses the money to pay off creditors. It’s a quick process, but it doesn’t leave you with much in the end. You may be able to keep your car and your house, depending on how much they’re worth, plus your furniture and retirement accounts. However, there are income limits, which vary from state-to-state, for Chapter 7 bankruptcy.

Chapter 13 allows a person to keep and use their property while paying off some or all debts according to a plan approved by the court. Payoff plans usually last 3 to 5 years, and you’re still liable for your debts until you successfully complete the payoff plan.

Advantages to filing for bankruptcy:

  • Some or all unsecured debt (for example, credit-card debt) may be dismissed in bankruptcy.
  • If you have secured debt (for example, a mortgage or car loan) you may be able modify the terms of the loan so you can afford the payments.
  • Subject to certain limits (which vary, depending on where you live), you should be able to keep your home, your car and some valuables.
  • When you file for bankruptcy, your creditors legally have to stop collection efforts.

Disadvantages to filing for bankruptcy:

  • Bankruptcy remains on your credit report for up to 10 years. During this time, you may not be able to get new credit, or may only able to get credit at high interest rates. So have to rely heavily, if not exclusively, on cash.
  • You may have trouble getting a new job if the company checks your credit report as part of the hiring process.
  • If you owe money to people or businesses in your community, it may be tough to keep your bankruptcy a secret from people.
  • If you own more than one car or several homes, you may have to sell some of that property to help pay down debts.
  • It’s ironic, but bankruptcy costs money. You’ll have to hire a lawyer, and you may have to pay a trustee’s fee and for mandatory personal finance classes.

Ultimately, you have to weigh the pros and cons filing for bankruptcy. If you’re facing serious financial problems, bankruptcy may make sense. But if you only have a few debts, filing for bankruptcy may be premature. Instead, you might be better off trying to negotiate a payment plan with your creditors. An experienced bankruptcy lawyer can also help you understand the options and the long-term ramifications.

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