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Personal bankruptcy offers a couple of options

Personal bankruptcy offers a couple of options

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Stressful economic periods lead to stressful family finances, which in turn can lead to bankruptcy filings.

Bankruptcy is not a panacea to lift up all your financial troubles and put a smile on your face, as late-night television commercials would have you believe. But in case it turns out to be the only answer, you should have a full understanding of available choices and potential repercussions.

Personal bankruptcies in the U.S. declined 8 percent in the first half of this year compared with the year-earlier period, according to the American Bankruptcy Institute. Chapter 7 bankruptcies fell 9 percent, while Chapter 13 filings were down 3 percent. Sounds good, but it may not be.

"The decline in personal bankruptcies isn't an indication that the economy is vastly improving, but rather an indication that people can't afford to file," said Doug Erickson, vice president in strategic programs for the nonprofit CredAbility ( counseling service in Atlanta. "It isn't cheap to file for bankruptcy, with a Chapter 7 bankruptcy costing you anywhere from $1,000 to $2,500 (in court and attorney fees), and payment is due up front."

Chapter 7 is the more prevalent personal bankruptcy, providing liquidation of a debtor's property and distribution by the bankruptcy trustee of proceeds to creditors. There is no repayment plan.

Chapter 13 bankruptcy, also known as the "wage earner's plan," allows people with regular incomes to develop a plan to repay all or part of their debts.

"If you don't have a source of income, you will not qualify to file Chapter 13," explained Erickson. "If you are unemployed but can make mortgage and car payments, you can file Chapter 7."

While you can keep your house in Chapter 7, unsecured debt such as credit card debt will be discharged, he explained. However, debt acquired within 90 days of filing can't be discharged — an assurance that you won't go on a shopping spree.

"Bankruptcy often indicates what is happening in your personal life more than what's going on in the overall economy," said Kim McGrigg, manager of community relations for nonprofit Money Management International in Denver. "When people can't think of anything else, that is when they think of bankruptcy."

The bankruptcy process is typically completed in a month or two, but results linger. A Chapter 7 bankruptcy remains on your credit report for 10 years from the date of filing, while Chapter 13 remains for seven years.

Because many loan applications ask whether you have ever filed for bankruptcy even after those seven or 10 years are up, bankruptcy follows you around. Have a clear, concise explanation for why you filed and how you took steps to recover.

Declaring bankruptcy doesn't kill chances of ever getting a loan again, because creditors mostly watch for a few years of good, timely payments on bills. A solid payment history through a low-limit secured credit card is one of the ways to re-establish credit.

A more significant challenge will be obtaining a comfortable loan. You don't want to be required — based on your past credit history — to pay interest rates so high that it is difficult to stay current with payments.

"Although there are downsides to bankruptcy, keep in mind that it is the right option for some people," added McGrigg, noting that it makes sense to have an attorney, even though not required, especially if there are complexities. "For some folks there just isn't going to be a scenario in which they can pay off their debts."

While illness, divorce and loss of employment are the primary drivers of bankruptcy filings, a lack of personal financial control often plays a hefty role. A persistent problem in weak economic periods when people would rather forget all about finances is putting problems out of sight and out of mind.

"The best way to avoid bankruptcy is to stay on top of your finances," said Gail Cunningham, vice president of nonprofit National Foundation for Credit Counseling in Washington. "Be financially organized by setting up a financial center in your home, and commit to visiting it once per week."

Cunningham said that if you've gone on a "mindless spending binge," then following this careful process will bring you back to reality. Nothing wrecks a budget like an unplanned expense.

If your finances seem to be turning bad, do not delay reaching out for help in the form of professional assistance, she said. Sitting down with a trained, certified credit counselor at a legitimate nonprofit agency will either assist you in finding a way out or confirm your suspicions that bankruptcy is really your only option.

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