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When to Consider Bankruptcy

Over the past five years, millions of Americans have made the decision to file for bankruptcy. Much of this is due to the harsh economic conditions that have been in place since the financial meltdown and mortgage crisis occurred in 2007. People who were already struggling with huge personal debt issues suddenly found themselves in an even more precarious financial situation.

As the economy shrunk, individuals were faced with having their hours reduced or worse yet being laid off. If they owned a home the chances were good that the equity they had accrued was now significantly less. Retirement funds were, in some cases, totally wiped out by bad investments. And some home mortgages were now "underwater"- meaning that homeowners owed more to their mortgage lenders than their homes were worth in the depreciated market.

All in all, the financial outlook for many Americans became very gloomy. But the truth is, it doesn't take a global recession to put your financial security in jeopardy. Every credit decision you make, each personal choice you commit to, all add to the financial picture that is a big part of your life. How you manage your money and the way you control your spending both play major roles in determining whether you will be debt free, comfortable, and secure or whether you will be constantly behind on your bills, living from paycheck to paycheck, or one medical emergency away from disaster.

Many people who decide to declare bankruptcy have gotten to that point through no fault of their own. The job market is still unstable and many people who are working now are actually underemployed. This translates to working for less money usually at a position for which you are over-qualified. Unfortunately, if your income suddenly decreases (or goes away altogether) you still owe your outstanding debt. It's a very tough situation to be in.

If you are currently trying to determine if bankruptcy is the right choice for you, here are some thoughts to consider before making the final decision.

Remember that you have every legal right to file for bankruptcy. But you should never rush into it without careful consideration of your own particular circumstances. Bankruptcy can be an effective method of eliminating most or all of your outstanding debt or else having it re-structured in a way that allows you to pay it off over time (generally three to five years).

Bankruptcy can give you a fresh financial start but it doesn't solve every monetary problem. If overspending and poor money-management skills have put you in the financial predicament you now find yourself in, then you need to seriously change your spending habits and the way you think about money. Unless you learn to live on a budget, save for emergencies and retirement, and make a strong commitment to control your spending, the chances are excellent that you will end up in the same financial mess in the near future.

It's important to understand what a bankruptcy can and cannot do.

A bankruptcy can:
  1. Stop wage garnishments by your creditors.
  2. Stop the foreclosure process on your home.
  3. Stop repossession of a car or other personal property.
  4. Legally absolve you from having to pay most or all of your debts. Your debts are "discharged" when your bankruptcy is finalized through the Court.
  5. Stop creditors from contacting you about your debt. They may not call you or send you written notices.
A bankruptcy cannot:
  1. Eliminate debts you incur after the bankruptcy. You are liable for all new debt.
  2. Eliminate certain secured debts such as a home mortgage or car loan. You must personally negotiate with these creditors regarding repayment because these debts are never discharged. If you want to keep your personal property (such as a home or car) you must continue to make payments and keep the accounts current.
  3. Eliminate the following types of debt: student loans, alimony, child support, and any unpaid State or Federal taxes which you owe.

The decision to file for bankruptcy is not an easy one. If you are dealing with overwhelming debt, receiving constant phone calls from creditors or collection agencies, or being threatened with garnishment of your wages, it may be time to honestly look at your situation and determine if bankruptcy is the right choice for you.

One important aspect of bankruptcy is the effect it will have on your credit for years to come. It's certainly worth mentioning and considering. If you take a Chapter 7 bankruptcy your debts will be cancelled (with some exceptions). However, any type of bankruptcy can have a very negative impact on your credit history. It can remain on your credit report for up to ten years. To be honest, if you have been struggling with your finances for months or years (late or missed payments, etc.) the fact is your credit score has probably already taken a hit. But expect it to take a further drop once the bankruptcy is recorded.

One positive factor is that even after a bankruptcy it is still possible to get new credit (although at a very high interest rate). It's a slow process but eventually you can recover and begin to build your credit again. The important thing is to learn sensible, smart money management skills and apply them to your everyday life. In this way, you can avoid ever having to go through such a stressful and troubling financial situation again.

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