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Avoid Bankruptcy: Part I

07-Sep-2012

Has your financial situation reached a point where you are considering bankruptcy as a way out of debt? Do you know how it can affect you now and in the future? Filing for bankruptcy when you're knee deep in debt can be the correct step to take, but are you aware of other well established methods to successfully avoid bankruptcy? It may be possible to keep a bankruptcy off of your credit report for the next 7 to 10 years. It is also possible to keep home equity and other personal property when you use other strategies outside of the bankruptcy process. Check out the following topics to find what bankruptcy is all about, why, and how you should avoid bankruptcy.
What is bankruptcy?
Bankruptcy is a federal court process where you get the chance to eliminate or reorganize your debts through discharge (which can mean the sale of assets), or by following a repayment plan that will often last 5 years. Consumers typically file either Chapter seven or Chapter thirteen personal bankruptcy depending upon your financial situation.

Good Reasons to Avoid Bankruptcy:

Your credit is badly hit: Chapter 7 and Chapter 13 bankruptcy have a negative effect on your credit. It can bring down your credit score by around 200-250 points. Moreover, the negative entry stays on your credit report for 7-10 years depending on the type of bankruptcy you file, thereby making it difficult for you to qualify for new loans and credit for the next 1 to 5 years. A bankruptcy may only remain on your credit report for 7 to 10 years, but you will find the question "Have you ever filed for bankruptcy" and "If so, when" on many types of financial forms throughout your adult life.

Property may be affected: There are certain assets that can be protected and other assets that you may not be allowed to keep under a Chapter 7 bankruptcy plan. Depending on your situation and your state's laws you could end up losing items that may otherwise have been avoided.

Not all debts can be eliminated: It's a myth that bankruptcy can get rid of all of your
debts. Back taxes, student loans, child support, alimony/spousal support, student loans
(other than the most extreme circumstances) and a few other debts cannot be gotten
rid of through bankruptcy. Therefore if you are looking to get rid of these kinds of debts,
you should avoid bankruptcy. You can look to budget around debts that cannot be discharged and negotiate other bills in a debt settlement or an alternative payment plan with your creditors.



Adverse effect on your financial future: Bankruptcy has an adverse effect on your financial situation. For instance, filing bankruptcy can influence the status of your security clearance if you don't inform your employer about your bankruptcy and why you've filed for bankruptcy, and can also limit future job opportunities depending on the field of work you are in.

You may not qualify for new credit: Getting approval for new loans/credit is tough after you've filed bankruptcy. It'll take anywhere from 2 to 5 years for you to qualify for a secured loan (such as mortgage). Unsecured loans are hard to qualify for if you file chapter 13 bankruptcy for the entire 3 to 5 year repayment plan.

Not all retirement plans are protected: While many retirement accounts are protected from creditors in a bankruptcy, not all are. You should inform your attorney of any pensions etc...

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