Overwhelming Debt? Bankruptcy May Be Your Way Out, But Maybe Not
Things are bad, really bad. They have to be for you to be considering bankruptcy. It's true that bankruptcy can wipe away your debts, or most of them anyway. Taxes are exempt from bankruptcy protection. You can declare bankruptcy, but if a substantial portion of your outstanding debt is back taxes, interest and penalties, you are not going to escape. If, however, most of your debt is credit card debt, mortgage, car loans and other consumer or business debt, there is a chance you may successfully escape most or all of your financial obligations.
Even so, is bankruptcy the best alternative for you? If you do declare bankruptcy, which type of bankruptcy should you consider? How will the new federal bankruptcy reform statute that goes into effect on October 17, 2005 affect you. In most cases you should be seeking qualified legal counsel for the answers to these questions. The devil, as they say, is in the details. You don't want to make a small mistake when declaring bankruptcy, only to lose some of the protection to which you are entitled. You only want to do this once. It will for follow you around for 10 years in the case of a Chapter 7 bankruptcy. Make sure your attorney is a bankruptcy specialist. Just using your uncle Joe who happens to be a lawyer may be a big mistake.
There are two types of bankruptcy for private individuals, chapter 7 and chapter 13. With Chapter 7 you can generally escape from all debt with a few exceptions such as state and federal taxes. You can keep certain exempt property as well. There is a federal exemption list Most states have an exemption list too. Most states require you use the state list but some allow you to choose from either the state or federal list. Property not on the list is sold to satisfy pay creditors.
Chapter 13 bankruptcy will require renegotiation and repayment of your debts. You will first file a petition for bankruptcy with the court and a trustee will be appointed. If your income exceeds your expenses, you will usually be required by the court to use the Chapter 13 option.
You will want to examine which alternative is the correct one for you. In fact, there are other alternatives to serious debt problems besides bankruptcy. One of these is a debt consolidation loan. Debt
consolidation loans are growing in popularity due to many factors including the rise in homeowner's equity, record low interest rates, and a dramatic increase in the level of consumer debt. This option can be much more attractive than bankruptcy. If you can keep from declaring bankruptcy, you will not have the social stigma and long term credit issues to deal with. There are literally hundreds of debt consolidation options available from many different lenders.
A debt consolidation loan is basically just a home equity loan used to pay off your higher interest debts. Because the loan is secured by real estate or some other valuable collateral, you get a substantially lower interest rate than can be had for most unsecured debts, such as credit cards. This contributes to a lower payment. In addition the term of the loan is usually longer than a credit card, contributing further to lowering the monthly payment. The decrease in monthly outflow can be just what the doctor ordered and can prevent bankruptcy. Be advised however, if the conditions that caused your monthly payments to rise are not corrected, you risk ending up facing bad credit problems again.
There are downsides to debt consolidation loans as well. First, you could lose your home. Also, you use up the equity in your home so you won't have to bail you out a second time.
Another alternative to bankruptcy is credit counseling. With this option, a credit counseling firm works with you and your creditors to arrange lower payments, make your debts current (called re-aging), and even possibly forgo a portion of your debt. This is an attractive option for many. It is being mandated by the new federal bankruptcy legislation as a step before bankruptcy in many occasions.
You may have to declare bankruptcy. It may even be the best course of action for you. However, bankruptcy may not be the best way to go and there are other alternatives. Do careful research on bankruptcy and the alternatives and evaluate your personal situation carefully before you make your decision.
About the Author
Steve writes about a multitude of business and finance topics. For important information that could save you thousands of dollars and more, see The Debt and Loan Consolidation Guide.
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