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Should I file Chapter 7 Bankruptcy?

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by , 07-10-2012 at 07:36 AM (3258 Views)

So you're wondering whether you should file bankruptcy?

People who rack up a bunch of debt sometimes ponder if it makes sense filing for chapter 7 bankruptcy to get rid of the debt. There are lots of reasons for which bankruptcy can make sense whether chapter 7 or chapter 13. But you need to realize that this decision does bring consequences, and it is also certainly not always the best option.

Should I discharge my debts in bankruptcy?

Read on and find out whether the negative impacts for you are overpowered by the benefits of bankruptcy.

When Filing Bankruptcy Makes Sense

Few circumstances leading to filing bankruptcy are beneficial:

1. First off, you've already tried negotiating your debts with creditors.

If you have tried to work your creditors down or to create a workable repayment with one or a bunch of creditors and they're not budging, this would be an indication for bankruptcy. Some of them want payment, they want it now, and they're not willing to do payments or to lower the payment amounts. You could call this a "back's against the wall bankruptcy" situation.

2. Secondly, if your Liabilities are overwhelmingly larger than your assets.

Another big reason individuals file bankruptcy is that they can't pay their debts and eat in the same month. Their monthly income requires them to choose one or the other. Take for example, a person owing $500,000 with a monthly payment of $4-5,000/month and who just lost their job. If assets along with income are now dropped to $2,000 all of a sudden, then bankruptcy may be one of only a handful of options to deal with the situation at hand.

Can I Keep my IRA in Bankruptcy?

Some people worry they lose their IRA or 401K if they file for chapter 7 bankruptcy. But since 2005, the Supreme Court has held firm on the fact that bankruptcy law from the federal level provides a shield for individual retirement accounts. Creditors cannot touch them whether in or out of bankruptcy. This should let you keep your IRA even if you file chapter 7.

What is the Risks or Downsides of Bankruptcy?

Filing bankruptcy is sometimes the right decision, and sometimes it's the only decision, but regardless of these facts, there are major consequences to bankruptcy which include:

1. Personal/Mental Effects. You're not a Failure!

Some people who file bankruptcy develp major complexes of failure. They think they've failed or that they are not worth anything as a person. They are not able to distinguish the difference between their intrinsic value as a person and literally as a child of God, and their financial mistakes. Heck, in some cases, there weren't even mistakes made, it may have simply been acts of God like natural disasters which led to the need to file bankruptcy. It's important to realize that you are not your mistakes. You can improve, you can change, you can move forward. Remember this, and keep moving. These problems are temporary and you will make it through these difficult financial times!

2. Mistaken Worries that You'll No Longer Be Able to Borrow.

Another huge concern that keeps some individuals from wanting to bankruptcy revolves around their concern that they will not be able to get lines of credit in the future. Yes, this will make new loans hard to obtain, but it will not make it impossible. But remember, you shouldn't be thinking about getting credit right now anyway! You should be thinking about getting income! Credit is what got you into this mess, so focus on making money and building assets, but before you can do that in many cases, filing bankruptcy is the answer.

3. You'll Forever Have Bad Credit As a Result. (But Don't Think about Credit Right Now, Anyway!

Just like the last reason, people who are too concerned about getting credit again have clearly not gotten the picture yet that credit is not what they need right now. The rules regarding credit reports are that the negative marks will remain on your report for 7 years, and bankruptcy for 10. Once it's gone, it will no longer be an issue, and it will even make your amount of actual debt plummet and can even improve credit scores in a fairly quick period of time. But once again, don't focus on getting more credit right now. Think about getting income and getting out of debt and building assets and savings for the future!

No Free Bankruptcy Lunches

Finally, when you consider if you should file bankruptcy, you'll need to realize that it typically costs around a thousand bucks to file. That is if you hire a good bankruptcy attorney who will represent and help to protect your assets that are exempt (i.e. he will help you keep your house, a car, and other protected property.) A good bankruptcy lawyer knows and understands and will protect your rights. They'll keep you from losing property that you could have kept and which is protected, like your house. Some people do perform bankruptcy on their own without an attorney, generally speaking an attorney is worth the experience, so find a good one in your area. If you are needing a place to start, check out the hundreds of bankruptcy lawyers listed in our directory here, you can select your state and then your city. There are thousands of highly rated bankruptcy lawyers here: bankruptcy lawyers.

A Good Word to the Financially Wise

Before you go about making any quick decisions regarding bankruptcy, make sure that you do make good efforts to work out some kind of payment arrangement with your creditors. Even though it does represent a bit longer of a solution to a current problem, it may be the best option for you in your situation. Talk to ethical bankruptcy legal counsel and they'll be able to tell you what kind of options are at your disposal. And talk to trusted close personal friends, a parent, and of course to your spouse as you work through these issues. Every one's situation represents a unique set of circumstances and and hearing different perspectives could be what you need. Don't sign on the line till you realize the pros and cons and whether it's the best decision for you to file bankruptcy right now.