When is Bankruptcy the Best Option?


When is Bankruptcy the Best Option?

Knowing when bankruptcy is the best solution to personal finance issues.
The thought of filing bankruptcy fills most people with dread and fear, but sometimes bankruptcy is not only the best option, it’s the only option. If you are faced with overwhelming debt, have little or no income, and cannot meet your financial obligations, bankruptcy can help you to get back on your feet.

Your Income Has Disappeared
Bankruptcy is often the result of a catastrophic financial problem, such as divorce, disability or unemployment. If you have no money left over to pay off debts such as credit card bills, medical bills, or even your car or house, bankruptcy may be your only way to get rid of these debts.

However, it’s a bad idea to file bankruptcy until you’ve taken steps to restore your income, either through another job or securing disability payments. Unless you’ve made these changes, Bankrate.com’s Dana Dratch says, “that clean slate is going to be a waste of time. Six months from now, you’ll just have a new set of bills and no bankruptcy options.”

You’re Drowning in Unsecured Debt
Maybe you’ve gotten a new job, or have additional income, but all of your money is going toward credit card bills and medical bills that have piled up over a period of years. If money is so tight that paying anything on these debts is impossible, a Chapter 7 bankruptcy can erase unsecured debts like these.

MSN Money’s Liz Pulliam Weston advises those with huge unsecured debt to consider whether they would be able to pay off these debts within five years. “If it would take more than five years … or you would need to use assets that would otherwise be protected in bankruptcy — like retirement accounts and home equity — then you should at least consult with a bankruptcy attorney about your options.”

You Don’t Want to Lose Your Home
If making payments toward unsecured debts is making it difficult to pay your house payment, and foreclosure may be in your future, you should consult a bankruptcy attorney who can help you decide if Chapter 7 or Chapter 13 bankruptcy can allow you to keep your home by erasing or reducing these debts. In some states, it is possible to keep your home under both Chapter 7 and Chapter 13 filings; talk to a bankruptcy attorney to see what the laws are in your state.

You’ve Exhausted All Other Options
Filing bankruptcy should never be your first option. Don’t file until you have talked to a reputable credit counselor (see “Resources”) to determine whether a debt management plan could help you reduce your payments to make it possible to pay your debts. A credit counselor can help you work with your creditors to reduce payments and/or interest and fees to make your payments manageable for you.

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