Declaring Personal Bankruptcy

Declaring Personal Bankruptcy

If you're drowning in debt and creditors have your phone ringing off the hook, personal bankruptcy might seem the only way out. Indeed, for people whose debts dwarf their ability to pay, declaring bankruptcy can be a fast way to gain a fresh financial start.

There are two types of bankruptcy petitions you can file: Chapter 7 and Chapter 13. Each of these have a different purpose and different set of circumstances attached.

Chapter 7 bankruptcy involves the seizing and liquidation of your assets. This includes real estate, stocks, bonds and valuable property. Once liquidated, the proceeds are used to pay off the various creditors you owe. Property exempt from Chapter 7 bankruptcy includes vehicles worth less than $1500, most household furnishings and goods and clothing. You are also entitled to retain $18,450 worth of equity in your home.

The goal here is to leave you with enough to make a fresh start after bankruptcy is declared so you don't end up completely destitute. At this point, you are discharged of all remaining debts. Once bankruptcy is filed, your creditors must cease from any lawsuits, wage garnishing, letters or telephone calls compelling you to pay.

There are some debts that cannot be discharged by filing for bankruptcy. These include current or back-owed child support and alimony payments, most student loans, recent tax bills or debts to creditors toward whom you've exhibited dishonesty in the past.

Within a relatively short time period after filing for Chapter 7 bankruptcy, your debts will be discharged and you will have a clean financial slate. However, filing for Chapter 7 does not always guarantee freedom from your debts. If a judge deems you fit to pay, you may be denied Chapter 7 bankruptcy and forced to file for Chapter 13.

Chapter 13 bankruptcies goal is not to discharge you of your debts but to reorganize them and develop a court-ordered repayment schedule. A person who files for Chapter 13 bankruptcy typically has three to five years to pay off all debts to creditors. Chapter 13 bankruptcy is preferable for people who want to retain ownership of their property and assets, and/or have a reliable and prolonged source of income.

Regardless of which type of bankruptcy you file, you must consider your co-debtors carefully before making the decision to file for bankruptcy. If there are people who have co-signed for loans but who are not declaring bankruptcy jointly with you, if your debts are discharged, your creditors will go after your co-debtors to collect your portion of the debt.

You may be afraid that declaring bankruptcy will permanently ruin your credit rating, but this is not true. If you are already in a position to considering bankruptcy, chances are that you credit rating is already so poor that declaring bankruptcy could not make it any worse. A fresh financial start and the opportunity to rebuild credit from the ground up may even improve your credit rating in the long term.

Whatever decision you make regarding personal bankruptcy, it is never a bad idea to consult with a lawyer, financial advisor or credit counselor before proceeding. These professionals can advise you on the most prudent course of action to protect the integrity of your financial future.