Know When to Hold 'Em, Know When to Fold 'Em: The Ins and Outs of Bankruptcy

Only the truly fortunate have experienced a lifetime without the burden of debt. Whether a string of bad decisions or unfortunate events, a combination of both, or just plain getting in over your head, big bad debt can happen to genuinely good people. When it gets out of control, and the prospects of repayment are bleak, it may be time to consider bankruptcy.

Bankruptcy for the Layman

Bankruptcy is discharging your debt through a legal process. There are five types of bankruptcy, but pertinent types for the individual or family are Chapter 7 and Chapter 13. Each type has its pros and cons, and choosing which to pursue is a matter of deciding which will wreak the least amount of havoc.

Chapter 7: The ‘Liquidation’ Deal

For anyone who has had a garage sale, you know the painstaking process of assessing the value of your belongings and selling them for pennies on the dollar. The same premise pertains to Chapter 7, only the proceeds go toward paying off your debt. Certain assets are off-limits during a Chapter 7, including a primary home or vehicle used for commuting, retirement savings, and benefits like Social Security and welfare - all of which are considered exempt. Non-exempt items include secondary homes and vehicles as well as other extraneous assets. All of these non-exempt items are sold in a bid to satisfy as much of your debt as possible. Whatever qualifying debt remaining is then discharged.

Chapter 13: The ‘Wage Earner's’ Help

Chapter 13 involves setting up a reasonable three to five year payment plan, mutually beneficial for both debtor and creditor, and at the end of three to five years, the remaining debt is discharged. The primary difference between Chapter 7 and Chapter 14 lies in keeping your assets versus finding other resources for paying down debt.

Taking the Gamble

If you have accumulated more debt than you can reasonably pay off during the next five years, you may want to consider declaring bankruptcy. If you do so, expect to pay filing fees as well as attorney fees, if you opt to retain representation. Long-term, the bankruptcy will remain on your credit report for 7 to 10 years for Chapters 13 and 7 respectively. Therefore, potential creditors and employers for a long time to come will be able to see that you filed bankruptcy. Keep in mind there are certain loans and debts that can't be discharged, like student loans and taxes. rnMaking the decision to file bankruptcy should not be taken lightly. Consider the ramifications, but also remember your looming debts will be discharged. Additionally, once you have officially declared bankruptcy, all of your creditors must immediately cease any badgering phone calls and debt collection efforts. The dark cloud may finally be lifted, and if you can weather the storm and learn the lessons you need to rebuild, the relief of a second chance will be well worth it.