When a person files bankruptcy, they’re making a legal declaration that they’re no longer able to pay
some or all of their debts.  After a bankruptcy is filed, the court can forgive the debt or require the debtor
to repay all or part of the bankruptcy.  There are three types of bankruptcy that individual debtors can file
– Chapter 7, Chapter 11, and Chapter 13.

Chapter 7

If you filed Chapter 7 (liquidation) bankruptcy, you would sell your assets to repay some or all of your
debt.  If you didn’t have any assets, the court would discharge your debt.  After debt is discharged, you no
longer have to repay it.  The creditors can’t attempt to collect the debt from you.

After October 2005, the new bankruptcy law made it more difficult to file Chapter 7 bankruptcy by
increasing the minimum income level.  Filers who make more than the median income in their states
cannot file Chapter 7 bankruptcy, but must file Chapter 13 to receive relief from their debt.

Chapter 13

Chapter 13 bankruptcy allows debtors to restructure their debt payments over three to five years.  Most
people file Chapter 13 bankruptcy when they have secured debt, like a car loan, or do not qualify for
Chapter 7 bankruptcy.

Chapter 11

Individuals who have large amounts of debt can restructure their debt by filing Chapter 11 bankruptcy.  
This type of bankruptcy is very similar to Chapter 13 in that debts are restructured and repaid rather than
discharged, as is Chapter 7.  

Consequences of Bankruptcy

Someone who’s overwhelmed with debt might be able to have their burden removed by filing
bankruptcy.  However, there are long term effects with the procedure.

Bankruptcy goes on your credit report and remains for up
to 10 years.  It’s also included in your credit score – the
numerical summary of your creditworthiness that most
creditors and lenders use to approve your application.  
A past bankruptcy can make it hard to get new credit
and loans especially when it’s more recent.

Potential employers also look at your credit report and
could deny your employment application as a result of
the bankruptcy.

Just because the bankruptcy falls off your credit report
doesn’t mean no one will ever know you filed.  Many
applications ask if you’ve ever filed bankruptcy.  If you
answer that you haven’t when you actually have, you are guilty of fraud and could be prosecuted.

If you get into debt again after filing bankruptcy, you won’t be able to file again immediately.  You may not
be able to file again for up to eight years depending on the type of bankruptcy.

Avoiding Bankruptcy

There are ways to handle your debt and avoid bankruptcy.  For starters, you can come up with a plan to
pay off your debt based on the amount of your debt and your monthly income.  Cutting back some of your
expenses may give you the extra money you need to pay your debt.  Paying off your debts one by one will
keep your credit intact and give you the money management skills you need to avoid getting into debt in
the future.

If you have trouble making your own debt plan, consumer credit counseling is another option to avoid
bankruptcy.  The new bankruptcy law requires you to receive credit counseling before filing bankruptcy.  It
might prove to be a viable option.  A credit counselor will work with you and your creditors to create a
debt management plan that will allow you to repay your debts over a period of time.

Consolidating your debts may be possible if your credit score is still favorable.  You can use a loan to
pay off your debt, and then repay the loan over a period of time.  Many people use a second mortgage or
home equity loan to consolidate their debts.  Be careful about using a loan that’s secured by your home.  
If you default on the loan, your home is at risk of foreclosure.

When Should You File

Whether to file bankruptcy is a personal decision that shouldn’t be taken lightly.  Should you decide to file
bankruptcy you should be aware of the effects.  Here are some things to consider as you evaluate your
financial situation.  You might file bankruptcy if:

       You wouldn’t be able to repay your debt within five years.
       You don’t have many assets or savings.
       Your wages are being garnished.
       You’ve had a repossession.
       One or more of your debt payments are more than 30 days past due.

Seek the advice of an experienced bankruptcy attorney, for more bankruptcy information before you
decide to file.

This article was submitted by Robert Valentine of Financial and Retirement Management.Robert Valentine is a well-known expert in the matters concerning investors. His articles on financial planning matters that concern investors have been published by several publications throughout the United States.