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Is bankruptcy right for you?

If you find yourself having trouble paying your bills, you are not alone. The economic slowdown of recent years has put you in the same position as millions of Americans. Despite this fact, you may be thinking what your debt-relief options are. The answer depends on your particular situation, but for many, bankruptcy is the best choice.

Benefits and limitations of bankruptcy

Bankruptcy is a legal proceeding that allows people in debt to get a fresh financial start. Some of the things that bankruptcy can do for you are:

  • Stop your creditors’ harassing phone calls
  • Eliminate your legal obligation to pay most or all of your debts through what is called a “discharge”. Such debts include medical bills, credit card bills and personal loans.
  • Stop the foreclosure of your home and allow you to catch up on missed payments
  • Stop wage garnishments
  • Restore or prevent the termination of your utility services because of nonpayment of previous bills

Although bankruptcy is a powerful tool, it does have its limitations. For example, bankruptcy cannot:

  • Eliminate certain rights of secured creditors-creditors who have the right to take back or repossess collateral if the debt is not paid. Although bankruptcy can help you restructure payments, in general, you cannot keep the collateral unless you continue to make payments.
  • Eliminate your legal obligation to pay certain debts such as alimony, child support, recent taxes, criminal fines and student loans
  • Eliminate your legal obligation to pay debts that are incurred after you file bankruptcy

Types of bankruptcy

Generally, there are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. Each type has its advantages and disadvantages.

In Chapter 7 bankruptcy, your property that is not exempt by law is sold by a trustee to pay off your debts. Once the non-exempt property is sold, you receive a discharge that exempts you from the obligation to pay back most of your debts, even if the debt was not fully paid for by the sale.

Despite what you may have heard, this type of bankruptcy does not force you to sell all of your property. Most of the your important possessions, such as a car, house and certain personal times are exempt from the bankruptcy estate by law. This means that such property cannot be sold as part of a Chapter 7 bankruptcy to pay your debts.

As powerful as Chapter 7 is, it does have some drawbacks. For example, you must pass a means test to qualify. If your income is too high, you may be ineligible for Chapter 7. In addition, Chapter 7 cannot stop the foreclosure of your home.

Chapter 13 bankruptcy, on the other hand, is for debtors who have a regular income. In this type of bankruptcy, there is no sale, so you can keep your possessions while you consolidate and restructure your debts into an affordable payment plan. You make payments under the payment plan for three to five years, often paying a fraction of your outstanding debts. Once you made all payments under the payment plan, you receive a discharge relieving you of the obligation to pay the balance of any debt that was not fully paid under the plan.

One of the main benefits of Chapter 13 is that it allows you to stay in your home while you catch up on your mortgage arrearages under the payment plan. In addition, Chapter 13 can, in some cases, eliminate your need to continue making payments on a second or third mortgage.

The main drawback of Chapter 13 is that most of your disposable income must be paid into the plan for the duration of the bankruptcy (which can be three to five years).

Consult an attorney

The decision to file bankruptcy should not be taken lightly. If you are in debt and considering bankruptcy, contact an experienced bankruptcy attorney. An attorney can explain your debt-relief options and recommend one based on your particular situation.