Personal Bankruptcy: Tips and Resources to Cure the Financial Blues

Many myths and misconceptions surround bankruptcy. Perhaps the biggest fallacy is most people believe in order to file for bankruptcy protection, a person must be completely destitute. This is simply not the case. The only requirement for filing bankruptcy is that the debtor is unable to pay their bills.

It's important to note that filing bankruptcy does not guarantee it will be granted. While any U.S. citizen is allowed to file for bankruptcy protection, there is no law stating it must be granted.

Another common misconception about bankruptcy is that once you file, all chances of obtaining credit in the future are destroyed. While bankruptcy can remain on your credit report for up to 10 years, debtors can still obtain credit. Chances are individuals who have filed bankruptcy will pay higher interest rates on any credit extended to them. Additionally, creditors generally do not extend high levels of credit.

Debtors who file for bankruptcy protection and seek credit after the fact will probably have to be content with $300 to $500 lines of credit for several years. In all honesty, this is probably for the best because it provides the debtor with the opportunity to renew their credit history without providing too much "financial rope" with which they could hang themselves.

A third common misconception about bankruptcy is that once you file, you can never buy a house. The truth of the matter is, if a person can supply a sufficient down payment and has no outstanding tax liens or judgments, most banks will approve a mortgage loan. However, with the current credit crisis, it has become increasingly difficult for anyone to obtain a mortgage loan; let alone people who have filed bankruptcy.

If you are considering purchasing a home, it is extremely important to wait until you have your finances back in good order. By waiting two or three years to obtain a mortgage loan, you will be able to clear up your credit and provide a track record exhibiting your ability to pay rent on time.

Experts recommend paying rent with a personal check as opposed to paying in cash or with a money order. If you aren't able to obtain a checking account, the next best option is to pay your landlord with a money order and obtain a printed receipt. Switch over to paying by check as soon as you are able to obtain a checking account.

Many people are led to believe that taxes cannot be discharged in bankruptcy. The truth is certain taxes can be included in a bankruptcy petition. Personal income taxes which are more than three years old can be discharged through bankruptcy, while fiduciary taxes due on businesses or estates cannot be discharged. The Bankruptcy Code provisions relating to discharging taxes are complex and differ by chapter. Therefore, it is always best to consult with a qualified bankruptcy attorney.

There are six types of bankruptcy. Two are used primarily for personal bankruptcy, while the remaining four are used for business or farming. Below is a quick synopsis of each:

Chapter 7 is the most common personal bankruptcy chapter. Oftentimes referred to as Liquidation; Chapter 7 bankruptcy requires debtors to liquidate assets to repay creditors. Outstanding balances are discharged, giving the debtor a fresh financial start.

Chapter 13 allows debtors to retain their assets through the establishment of a repayment plan. The new bankruptcy laws require debtors to repay a portion of their debts; making Chapter 13 a requirement in most cases.

Chapter 11 is generally reserved for corporations and involves reorganization of debt. The bankruptcy court must approve a confirmed repayment plan which allows the debtor to repay or discharge a portion of their debts.

Chapter 12 provides debt relief to family farmers and fishermen. Referred to as Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income; this bankruptcy chapter is similar to Chapter 13 and requires repayment of debts.

Chapter 9 bankruptcy is reserved for cities, towns, villages, counties, utility companies and school districts. Known as "Debts of Municipality", Chapter 9 is similar to Chapter 11 in that it requires reorganization of debt.

Chapter 15 is known as Ancillary and Other Cross-Border Cases. This bankruptcy chapter addresses debt issues which are subject to the laws of the United States and one or more foreign countries.

Detailed information on each bankruptcy chapter can be found at The Federal Judiciary U.S. Courts website.

The most common reason people file bankruptcy is to reduce or eliminate their debts. In the past, debtors would file for Chapter 7 bankruptcy (liquidation of debt) in order to obtain a clean financial slate.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), enacted in 2007, implemented a provision which requires debtors to repay a portion of their debt whenever possible. Today, most people are required to file Chapter 13 bankruptcy; reorganization and repayment. Learn more about the new bankruptcy laws.

Another common reason for filing bankruptcy is to stop foreclosure. While it is true filing for Chapter 13 bankruptcy can halt lenders from foreclosing on real estate; debtors are still responsible for making their mortgage payments and paying any arrears. This is generally accomplished through a loan modification or mortgage forbearance agreement.

Debt collectors have caused more than one person to file for bankruptcy protection. Collection agents are notorious for using high-pressure tactics to recoup their losses. Instead of being reasonable, they hound people until they can no longer take the pressure. It's important to know your rights against creditors. If you're being harassed by creditors, consider spending time at www.CreditInfoCenter.com.

Other reasons people file bankruptcy include:

Prevent repossession of an automobile
Reduce medical bills
End wage garnishments
Consolidate student debt

One excellent resource for understanding the intricacies of bankruptcy is BankruptcyHome.com. You'll find hundreds of articles on everything you ever wanted to know about bankruptcy.

Understanding the intricacies of how to file bankruptcy typically requires the services of a qualified bankruptcy attorney. Although hiring a lawyer is not required by law, few people possess the fortitude to undergo the bankruptcy process on their own. The complexities of BAPCPA could place debtors who file without legal representation at risk for having their petition rejected.

Read the entire "How to File Bankruptcy" article here.

Prior to the new bankruptcy laws, it was relatively easy for debtors to file personal bankruptcy. In many instances, debtors were able to file without the assistance of a bankruptcy lawyer. Today, filing bankruptcy is considerably more difficult. Not only do debtors need to retain the services of a qualified bankruptcy attorney, they also must undergo the 'means' test and obtain credit counseling from an agency approved through the U.S. Trustee Program.

The number of people who fail out of bankruptcy is increasing at an alarming rate. When a person files Chapter 13 bankruptcy to reorganize their debt, they must submit a repayment plan to the court. Due to the stringent restrictions imposed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, many debtors are unable to adhere to the repayment plan for more than a few months. Just one missed payment can cause a person to ail out of bankruptcy. When this occurs, creditors can petition the court and request the bankruptcy be dismissed.

Every bankruptcy alternative should be considered prior to petitioning the court for personal bankruptcy. Although bankruptcy can be tempting when you are drowning in debt, it can carry consequences which can haunt you for years.

Determining which type of bankruptcy alternative is best suited for your needs requires a bit of research. Several options exist including debt consolidation, debt management, debt settlement, credit counseling and budgeting.