Considering bankruptcy

So the pundits are saying that the economy is turning around, but what about all the debt that you've incurred by weathering the storm? Even if the economy turns around, how do you get out of mounting debt, the threats of lawsuits from creditors, etc., etc.? You may want to consider a fresh start, and if so, you need to consider your options. So, is bankruptcy one of your best choices?

Bankruptcy and Chapter 7

Whether you are totally panicked or just considering your options, it will be comforting to know that the changes to the bankruptcy laws in 2005 didn't totally eliminate bankruptcy as an option. The law simply made it more difficult to wipe your financial slate completely clean under Chapter 7 if the government feels you can handle the repayment of your debts under credit counseling or potentially under Chapter 13.

Under the bankruptcy laws, you must first determine whether you qualify for Chapter 7, which means they will take a look at what you earn. If you are below the median income level, then you qualify and can file for Chapter 7. By the same token, if you fall above the median, you will need to meet the "Means Test" requirements to file. If you are looking to determine whether you qualify, you can click here for more information.

What bankruptcy does

Bankruptcy is not a cure-all. Though it can help with creditors and can eliminate or help clean up credit card debt, you will never be able to stop a creditor from repossessing property if you cease paying a secured debt. Moreover, certain chapters, such as a 13 may provide you with viable relief from mortgage/foreclosure issues and the like (see below).

Bankruptcy also does not typically eliminate tax debts or student loans, and it never eliminates or wipes clean your child support payments or alimony. These debts are simply the type that the government feels are too important to eradicate your obligation.

About Chapter 13

People often like Chapter 13 because they can reduce their debt levels so that repayment is manageable. Chapter 13, in other words, does not eliminate your debt; it enables you to reorganize it.

Credit counseling

You may be wondering why you would ever look into credit counseling or negotiating better payment plans yourself if you could simply file Chapter 13. However, the biggest advantage to working with a for-profit or nonprofit counselor is that credit counseling or even negotiating a better deal yourself does not appear as a bankruptcy on your record. On the flip side, you don't have the same protections from creditors as you would under bankruptcy.