Many people believe that declaring bankruptcy is the ultimate solution to their debt problems. In reality its not as simple and straightforward as it sounds. Due to it’s long lasting negative financial and emotional effects, declaring bankruptcy should only be considered as a last resort. Before you decide to take this irreversible step, make sure you understand what bankruptcy is and how it may affect you.

What is Personal Bankruptcy?
Personal bankruptcy is a legal procedure that declares your inability to pay back unsecured debts. Bankruptcy cases are always filed in the U.S. Bankruptcy Court-an adjunct to U.S. District court. Declaring bankruptcy offers a fresh start for people who can’t satisfy their debts.

Types of Personal Bankruptcy:
There are two types of personal bankruptcy:
Chapter 7: A Chapter 7 bankruptcy, also called a liquidation bankruptcy, allows you to discharge many of your unsecured debts. Discharging your debt means you don’t have to repay them. A Chapter 7 bankruptcy gives you a clean slate. Under a Chapter 7 bankruptcy a court appointed trustee will liquidate your assets and divide it equally to all your creditors. You can file for chapter 7 only once every 8 years.

Chapter 13: In a Chapter 13 bankruptcy, also known as reorganization, a court appointed trustee creates a debt repayment plan that you can afford. Generally, the repayment schedule lasts from 3 to 5 years. This type of bankruptcy allows you to keep your property, like a mortgaged house or car. Under a Chapter 13 repayment plan, payments may be deducted from your paycheck for up to five years. You will need to turn-over your disposable income to repay your creditors. Chapter 13 bankruptcy can only be filed once in 2 to 4 years.

How can Bankruptcy help me?
Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-off and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary from state to state. Once you declare bankruptcy your debts will be wiped off from your credit report.

What are the disadvantages of declaring bankruptcy?
The biggest and immediate disadvantage of declaring personal bankruptcy is its significant effect on your credit score. A bankruptcy stays on your credit report for up to 10 years, making it difficult to acquire credit, buy a home, get life insurance or sometimes get a job.

Other disadvantages are :

• Since bankruptcy is a federal court case, you will need to provide detailed financial records to the court and creditors. Your financial affairs will be out in the open for all to see.
• Filing for bankruptcy costs hundreds of dollars. You need to be aware of the filing fees.
• Recent law (signed into effect in 2005) makes it much more difficult to file for bankruptcy. According to this new law, before you can file for bankruptcy, you are required to show the court that you have done the following:
  • Credit Counseling
  • Complete a debtor education class.
  • You must pass a means test. This test compares your income to the median income in your state to determine eligibility.
  • Provide your detailed financial records to the court and your creditors within 45 days.
• Declaring bankruptcy does not eliminate the following types of debts:
  • Government Student Loans
  • Taxes
  • Alimony
  • Child Support

The decision to declare bankruptcy is a personal one and should not be taken lightly. It is important to weigh the pros and cons of declaring bankruptcy before making your decision. The long term consequences of bankruptcy will be far more troublesome than dealing with the debt itself. The government continues to make bankruptcy laws more stringent to keep consumers from using it as an “easy out”. There are other options available that can provide the same debt relief benefits of bankruptcy, without the long term negative financial, emotional and social effects of a bankruptcy. Click here to learn more about bankruptcy alternatives.