Advertisement
bankruptcy

Bankruptcy: The Last Resort

The law doesn't make it easy, and it's not something you should tackle on your own.

When you can't possibly pay what you owe and informal arrangements with creditors have failed, it might be time to think about declaring bankruptcy.

Remember, bankruptcy is a last-ditch solution, and it's not a do-it-yourself proposition; you'll want to hire an attorney with expertise in bankruptcy to help you make important decisions that will affect the outcome.

Advertisement - Article continues below

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes declaring bankruptcy more difficult and requires increased paperwork, more stringent limitations, and financial counseling from an approved nonprofit credit counseling service.

What kind for you? Individuals in tough financial straits typically can declare one of three types of bankruptcy: Chapter 7, Chapter 11, or Chapter 13.

In Chapter 7, known as straight bankruptcy, you give up your property to the court, which will divide it among your creditors, and ask the court to erase your debts. (The court can't repossess certain exempt property, such as a certain amount of your equity in a residence or a motor vehicle.)

To qualify for Chapter 7 bankruptcy, you must pass a "means test" involving an analysis of your income and expenses. If the test results show that your discretionary income is below $100 a month, you can file for Chapter 7. If discretionary income is over $100, you may have to file Chapter 13.

A provision of the new law bars filers who owe more than about $1.2 million from filing under Chapter 13, but allows them into Chapter 11, which is usually meant for businesses. Because Chapter 11 is designed to keep a business going, it allows the debtor to retain income earned after the bankruptcy filing while using only assets he had at the time of filing to pay past debts. For more information on different types of bankruptcy, see Bankruptcy Basics on the United States Courts website.

If you find yourself considering filing for bankruptcy, think again. You shouldn't take this step before you have exhausted the options outlined above. A bankruptcy stays in your credit file for seven to ten years. You may be able to qualify for new credit during that time, but not on terms you'll like.

Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020
How a Second Stimulus Check Could Differ from Your First One
Tax Breaks

How a Second Stimulus Check Could Differ from Your First One

The HEROES Act, which was passed by the House in May, would authorize a second round of stimulus checks. While the new payments would be similar to th…
July 22, 2020

Recommended

6 Money-Smart Ways to Spend Your Stimulus Check
Tax Breaks

6 Money-Smart Ways to Spend Your Stimulus Check

If you don't have to use your stimulus check for basic necessities, consider putting the money to work for you. You'll thank yourself later.
July 30, 2020
8 Money-Smart Ways to Spend Your Tax Refund
Tax Breaks

8 Money-Smart Ways to Spend Your Tax Refund

Since this year's tax deadline was pushed back to July 15, many people just recently filed their tax return. That means there are a lot of tax refunds…
July 17, 2020
Milliennials Face Their Second Recession
credit & debt

Milliennials Face Their Second Recession

Forty percent of millennials say the pandemic will likely cause them to delay payments on their debts. Does that include you? Time to take action.
June 4, 2020
14 Bankruptcy Filings Chalked Up to COVID-19
bankruptcy

14 Bankruptcy Filings Chalked Up to COVID-19

Bankruptcy filings are piling higher in the wake of the COVID-19 pandemic. Here, we look at a number of companies that have been forced to seek out ba…
May 22, 2020