Reference

Should I File For Bankruptcy?

(J. Scott Bovitz, Los Angeles bankruptcy attorney) Filing bankruptcy is a serious, personal decision. Never file bankruptcy lightly. Don't file bankruptcy before you have solved the financial problems which cause your financial trouble. But bankruptcy is available to honest debtors. It can help you with a "fresh start."

Here are some signs that a consumer should explore bankruptcy options:

**creditors have garnished wages

**you cannot pay back your debt in a reasonable period of time (say 3 or 5 years)

**several creditors hold judgments against you

**the collection agencies are calling frequently

**you are late in making payments on more than two or three bills

**you were out of work for a while, but now you have found a good job

**you have high medical bills which were not paid by your insurance

**you have no substantial assets

**your house has little or no equity

**your credit score is already low

TYPES OF BANKRUPTCY CASE
There are several "types" of bankruptcy case.

Chapter 7 is the "liquidation" case. A trustee is appointed to sell the debtor's non-exempt assets; however, many assets are automatically protected (exempt). The trustee pays something to creditors from the proceeds of the sale of the debtor's unprotected assets.

Chapter 11 is the complex reorganization chapter. Both businesses and individuals are eligible for this flexible chapter. However, it is very expensive.

Chapter 13 is for individuals. This is a "mini" chapter 11. Debtors pay something from their income over three or five years toward creditor claims. The court approves and supervises a chapter 13 plan.

THE BANKRUPTCY DISCHARGE
Under all cases, the person who files bankruptcy (the debtor) seeks a discharge of his claims (a "fresh start"). Not all debtors are entitled to a discharge of debts. Even if a debtor is to receive a general discharge of claims, not all claims are dischargeable.

For example, a debtor cannot usually discharge claims arising from: spousal and child support; recent taxes; student loans; drunk driving injuries; fraudulent debts; post-bankruptcy obligations.

Also, creditors holding collateral (like your house or car) keep their collateral. If you don't pay the mortgage, you will lose the house. If you don't pay the car payments, you will lose the car.

ELIGIBILITY TO FILE BANKRUPTCY
Most people are eligible to file chapter 7. However, people with high incomes may be forced to file chapter 11 or 13. In chapter 7, there is no limitation on the amount of assets or liabilities.

An individual can file a chapter 13 petition if she has "regular income" from a job or another source AND has limited debts. In chapter 13, the current limits are $1,010,650.00 in secured debt (like a mortgage on a house) and $336,900.00 in other (unsecured) debts.

Almost everyone can file chapter 11. However, chapter 11 is too expensive for most individuals.

THE AUTOMATIC STAY
Once a petition is filed, it creates an "automatic stay." This stops collection agency calls, lawsuits, and other actions by creditors. It also stops (temporarily) pending foreclosures. However, the holder of your mortgage can often get permission from the court to finish the foreclosure sale.

PLANNING FOR BANKRUPTCY
Debtors should plan for bankruptcy. For example, an informal review of assets may show that more assets can be protected (exempt) if simple steps are taken before a petition is filed. The timing of a bankruptcy is important, as well.

THE IMPACT OF BANKRUPTCY ON YOUR CREDIT RATING
Before bankruptcy, most individual debtors have poor credit scores.
Bankruptcy does not improve a poor credit score. A company is permitted to consider a prior bankruptcy when deciding if a former debtor is entitled to credit.

So, some debtors find it very hard to get new credit after bankruptcy. A bankruptcy can stay on your credit report for 10 years.

However, a person who does not move around a lot and has stable employment is often able to get some limited credit -- even with a prior bankruptcy on her credit report.

If an application for credit is denied, ask the credit issuer for a copy of the credit report used in that decision. Look at the report. If the report is wrong, make a request to the credit reporting agency to fix the error.