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Is Bankruptcy Your Financial Bail Out Package?

Thursday, October 27, 2011   /   by Justin Hoffmann

Is Bankruptcy Your Financial Bail Out Package?

The rate of bankruptcies is down considerably from a year ago, but a recent surge in the cases indicates some people still need this complicated form of relief from indebtedness, especially those suffering from foreclosure or other housing-related forms of financial distress.

Bankruptcy filings in June, 120,000 were up from 115,000 in May this year, and the unusual seasonal jump month-to-month puts the rate of bankruptcy filings at a 10 percent increase on a seasonally-adjusted basis, according to the National Bankruptcy Research Center (NBKRC)

Filings this year were still down 5 percent from a year ago and for the first half of the year filings are down 8 percent compared to the first half of the year last year.

Perhaps the seasonally-adjusted basis indicates a short term surge, given the number of filings has been steadily decreasing this year, month-to-month since March, according to the center.

Is bankruptcy for you?

You might consider bankruptcy if you truly cannot pay your bills and want to free yourself of some debt now so you can begin with a clean slate for the future.

If you qualify for bankruptcy, the court will discharge or cancel many of your debts or allow you to pay a reduced amount. After bankruptcy, many of your creditors can't come after you for any unpaid amounts.

Filing for bankruptcy is complicated. You should hire a bankruptcy attorney to represent you.

You have two bankruptcy choices.

Chapter 7 is a two- to three-month process of liquidation in which all but your exempt property (necessities like your home, car, land, pensions, retirement accounts, etc. ) is sold to pay your debts. Once your property is sold and debts paid, certain remaining debts, but not all, are discharged. For any exempt property you keep that's secured by a loan, you must still pay that debt if you want to keep what's securing the debt. Chapter 7 remains on your credit report for 10 years, but that doesn't necessarily mean you can't acquire credit. It won't be easy and you'll pay more than those without a bankruptcy on their credit report.

Chapter 13 is a three- to five-year process that allows you to retain possession of your property if you commit to a court-supervised plan to pay a portion of your debts. Later, some debts not paid in the plan could be discharged. The amount you must pay creditors varies based on your financial circumstances. You can use Chapter 13 to stop a foreclosure and include the home mortgage in your payment plan. Chapter 13 stays on your credit report for 7 years.

Only debts owed and listed with your bankruptcy case, but not debts you acquire after bankruptcy, can be discharged. You will also continue to owe some secured debts, income and property taxes, child support, alimony, government finds, restitution that's part of a criminal sentence, student loans and debts incurred through fraud, including credit card use, immediately before you file for bankruptcy.

Secured debt are those obtained with collateral and, perhaps, a lien placed on the collateral. Mortgage and car loan are secured debts. Credit cards, signature installment loans are examples of unsecured debt, unless the creditor sues to collect and wins a judgment.

You can't just walk into bankruptcy court and file, you must first qualify.

To file Chapter 7 you'll have to take a "means test" to determine your ability to pay creditors. If the test reveals your income is above the median income for your state, you can't file Chapter 7, but can convert your case to Chapter 13. With income at or below the median income you can be permitted to file for Chapter 7.

Other qualifying rules are complicated and require the assistance of a bankruptcy attorney.

A bankruptcy can help in a variety of ways.

During the qualifying process, 180 days before you file for bankruptcy you must get credit counseling from a government-approved organization. You must also complete a debtor education course before your debts are discharged. Among a host of topics, the lessons include budget development, money management, financial planning, the wise use of credit.

During the process you'll also run an analysis of your financial condition and learn what caused your financial condition, alternatives to bankruptcy, how you can develop a plan for future hardship.

Alternatives to bankruptcy can surface during the qualifying process.

In addition to discharging your debts or creating a less stressful repayment plan, and learning how to better manage debt, the moment you file for bankruptcy, many creditors must beg off and leave you and your property alone and stop all collection efforts including court suits at least until your case is resolved.

Counseling is key.

The idea behind counseling is to prevent you from becoming a serial debtor. Consumers who get counseling exhibit significantly improved credit profiles in as little as two years in comparison to consumers who do not.

You'll have to cough up $299 for Chapter 7; $274 for Chapter 13 and any additional administrative fees the court imposes. Attorneys typically charge an additional fixed fee and you may have to pay for counseling.

by Broderick Perkins

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