Bankruptcy: Should you file?

2005-12-20

There are several factors regarding personal bankruptcy that you need to consider before you can make an informed decision regarding whether or not filing bankruptcy is the right course for you to take. By going through this basic bankruptcy information you will hopefully gain a better understanding for the general idea of bankruptcy filing in the United States and how filing bankruptcy could affect your personal situation. If you feel that you need more information, or bankruptcy help, you should not hesitate to contact a professional that can help you with your specific financial situation.

The most common type of bankruptcy for individuals is Chapter 7 bankruptcy. In 2003, there were more than 1 million filings for personal bankruptcy under Chapter 7 of the U.S. Bankruptcy code. This can for instance be compare to the 468,562 filings for personal bankruptcy under Chapter 11 during that same year.

When a company files for bankruptcy, all its assets are sold and used to pay off the creditors. When you file for personal bankruptcy you will however be allowed to keep certain exempt property. All your other assets will be sold by an interim trustee appointed by the United States Trustee. Several types of liens, such as real estate mortgages, will survive a personal bankruptcy under Chapter 7, while many types of unsecured debts will be cancelled. As of 2005, there are 19 different types of debt classes that will not be discharged by a Chapter 7 bankruptcy. Examples of such debts are child support, a majority of the student loans and most taxes. If you have been imposed to pay fines and restitution after committing a crime, such debts will also stay after a Chapter 7 personal bankruptcy.

There are several strong reasons for you to try to avoid bankruptcy. Despite what some people think, personal bankruptcy is not a swift and easy way to leave all your financial problems behind you and start over fresh. Your personal bankruptcy will be noted and stay on your individual credit report for 10 years. This can make it difficult for you to obtain new credits. Not only can you be disqualified for larger loans, such a real estate mortgage, you can also encounter troubles when you want to buy smaller things, such as gas or groceries, without paying in cash. If you are given credit, you will usually end up paying much higher interest rates than normal since you are viewed as a higher risk by the credit providers. Avoiding bankruptcy and trying to sort out your financial situation in other ways can therefore often be recommended, especially if a large part of your debts are debts that will not be removed by a Chapter 7 personal bankruptcy.

The positive part of a Chapter 7 personal bankruptcy is that a smaller or larger part of the actual debt will be removed from your credit record, and this will usually improve your creditworthiness. After a Chapter 7 personal bankruptcy you can begin to slowly build up your financial situation and creditworthiness again without being pushed back by an enormous debt. A Chapter 7 personal bankruptcy is therefore more advisable for those with large debts that will be removed by the personal bankruptcy, than for those who have debts that origin from unpaid child support, taxes, student loans, fines and restitution.

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