Personal Finance – Money news, Analysis

Most people in the United States carry debt. Whether it’s a mortgage, an auto loan, or an outstanding credit card bill, debt is usually necessary to cover life’s basic necessities. But allowing your debt to grow beyond the basic necessities can be the starting point for financial meltdown. In fact, most bankruptcies occur because a person with a large accumulation of debt suddenly suffers from a life crisis like a divorce, unemployment, or health problem. This type of crisis can create a financial situation where even the minimum monthly payments are too high.

When this happens, an ever-growing pile of bills and constant calls from creditors can put anyone over the edge. At that point, declaring bankruptcy may seem like the only solution.

Is it the Only Solution?

Of course, bankruptcy isn’t all rainbows and sunshine. Before declaring bankruptcy, it pays to do your homework. Start by making an appointment with a credit counselor – something that everyone who actually declares bankruptcy is ultimately required to do. Meeting with a credit counselor first is the best way to find alternatives to declaring bankruptcy, like credit consolidation or better budgeting. In some forms of bankruptcy (Chapter 13, for example), the court actually creates a budget for the debtor, which he then must sign and pledge to follow. Rather than waiting for the courts to force the issue, let a professional help. A credit counselor can help you work out a tighter budget – one that makes meeting monthly payments a real possibility.

Once Bankruptcy has Been Declared

If declaring bankruptcy is the only solution, then know what you’re getting into.

Once bankruptcy is declared, the courts will decide whether you qualify for Chapter 7 or Chapter 13 and set up a 341 meeting.

Chapter 7 is the “better” type of bankruptcy. In a chapter 7, all unsecured debts are wiped away, and the debtor gets a true fresh start. To pay off existing creditors, all non-exempt assets will be sold by the bankruptcy trustee. If there are any secured assets, you’ll still have to meet the monthly payments on those – otherwise, they go back to the lien-holder on the property. But the good news is that because all unsecured debts have been eliminated, it’s usually much easier to meet the monthly payments on secured assets, like a home or car.

Because new laws have been passed which favor creditors, it has become much more difficult to qualify for a Chapter 7 bankruptcy. Most people who don’t qualify for Chapter 7 will file under Chapter 13. In a chapter 13 bankruptcy, the trustee will create a repayment plan together with the court. Within the framework of the plan, a portion of the debt will be paid back in monthly payments over the course of three to five years. At the end of that time period, the remaining debt is forgiven. Read more