If you're faced with a mountain of debt, personal bankruptcy may seem like the only way out from under the mess, but in fact, this method of alleviating debt does not come without its own risks and drawbacks. It is certainly true that personal bankruptcy is an option if you have no other, but it's also very true that today, people are filing for bankruptcy in record numbers, when in fact they may have other options available to them that would be better.
There are a few things that you should be aware of when it comes to personal bankruptcy. First of all, it doesn't simply "wipe your record clean" when it comes to debts. It's true that a lot of your debts will probably be forgiven depending on your financial situation, but not always. And not every debt can be forgiven, such as taxes owed, child support payments, and so on. That is, if a lot of your debt comes from these sources, personal bankruptcy isn't going to help you get out from under that debt, because you'll still owe that money.
Other things you should be aware of
New laws in personal bankruptcy
New laws in personal bankruptcy may thwart your efforts to file for bankruptcy, too. Bankruptcy laws were rewritten in 2005 such that it's no longer simply possible to "walk away" from your debts if you're financially solvent. In other words, if you've got a decent job and a steady income, but you've run up your unsecured debt such that you're over $100,000 in credit card debt, you CAN probably still file for bankruptcy, but it's probably going to be a type of bankruptcy whereby you're still going to have to repay your debts on a schedule, to an amount based upon your income and scheduled over a course of probably three to five years.
If your situation is such that you truly have no other way out and your financial situation, too, is dire, you will probably be allowed to file for what is called Chapter 7 bankruptcy, where your debts are going to be forgiven (other than those previously mentioned, like child-support or back taxes). To do that, though, your income must fall below the median income for your state for the last six months. Most people who file for bankruptcy do qualify for Chapter 7 bankruptcy.
Filing for bankruptcy is not free
Even if you're completely broke so that bankruptcy is your only option, be aware that you're going to have to come up with the funds to pay for your attorney. (You can try to go through the process all by yourself, but an attorney can help you navigate the waters much more easily, and help you get the best outcome possible.)
If you have a steady income and most of your debt comes from unsecured debt, like credit card debt, it's probably a good bet that you can pay off this debt yourself without having to file for bankruptcy. You won't have the black mark on your credit record for seven years, and you have the peace of mind knowing that you did indeed take care of your debts.
To do this, you're going to have to be very strict with yourself, and set up a budget whereby all but 10% of your disposable income after taxes goes toward paying off your credit card debt. (The 10% saved out goes into a savings account for emergency use only.) You'll find that in general, by paying off one card at a time starting with the highest interest rate first, you can generally get out of debt yourself within several years, and your credit rating will begin to improve almost immediately.
When there is no other option besides bankruptcy
If a lot or all of your debt comes from suddenly acquired debt like extensive medical expenses that you could not avoid, you may indeed have to file for personal bankruptcy. If this is the case, take heart; bankruptcy exists just for people like you who've done everything they could to do things right and still found themselves in dire financial straits. So if you do have to file for bankruptcy, it's not always something to be ashamed of. If you've done everything you could to do things right and find yourself in this situation, take it as the gift it is to get you out of trouble now.
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