Knowing When To File For Bankruptcy

For many people, declaring bankruptcy means an end to debt collectors calling, eliminating debt and starting with a clean slate. Although for the most part, filing does wipe the slate clean, there are important things to remember when deciding to file.

Chapter 7 and Chapter 13

Before deciding to file, it is important to understand the different types available. Each type has different requirements for filing.

Chapter 7 allows you to discharge almost all debt, with debts such as past due child and spousal support excluded. Under this type of filing, a trustee is appointed to collect all property that is not exempt from seizure and sell it, with the proceeds divided among creditors. Under Chapter 7, debts such as credit card, medical and utility bills, as well as store cards and personal loans may be eliminated. This type of filing remains on your credit report for ten years.

Chapter 13 allows those with steady income to keep certain property, including homes with mortgages or cars with auto loans. The court approves a repayment plan, administered by a trustee, that allows your creditors to receive payment for the money they are owed. Past due student loans and child support must be repaid in full, and, in some cases, the court will require repayment of all debt under the repayment plan. Under Chapter 13, repayment of debt lasts between three and five years through an interest-free repayment process. For seven years, the filing will appear on your report.

In both types, you will be required to provide a certification for a completed financial management course from an approved agency to the courts.

Threatening Calls

If you have been receiving threatening phone calls or are avoiding collection calls, bankruptcy may be the best option available. Another reason to consider filing is if your home is facing foreclosure or your auto loan holder is threatening repossession. Although secured loans, such as mortgages and auto loans may not be discharged, filing may reduce your expenses significantly, allowing you to apply more money to your home or auto loan.

Exhausted Savings

It may be time to consider filing if other options have been exhausted. Because discharging your debt should be a last resort, consider filing especially when your debt is growing and you have exhausted, or are about to exhaust, your savings. If you have looked into reducing your budget and found that there is no way to pay off your debts, discharging your debt may be the answer.

Before deciding to file, be sure that you understand the different types available and that you have exhausted all other options. Although discharging your debt will have a temporary negative effect on your financial rating, it allows you to start fresh, with a clean slate, and gain financial freedom.

Rachel is a blogger for David Kohm & Associates, a bankuptcy lawyer in Fort Worth, TX that specializes in Chapter 7 and Chapter 13 bankruptcy. You can follow David Kohm @KohmLawDFW.