CONTEMPLATING BANKRUPTCY Bankruptcy is a way to resolve your debts when you are no longer able to pay them. Generally speaking, you as an individual may choose between two different bankruptcy options--Chapter 7 or Chapter 13. Your choice will depend in part on your financial circumstances. Either way, however, bankruptcy is a step with serious consequences and should not be taken lightly. Chapter 7 If you have enough income to meet your living expenses but have nothing left over to pay your debts, you will probably file for Chapter 7. In this form of bankruptcy, you aren't expected to pay anything on your debts unless the court requires you to sell some of your assets. Does this mean that you're required to sell everything you own? No. You're allowed to keep certain exempt property. The federal government has adopted a set of exemption laws; what you can keep under Uncle Sam's rules includes: $17,425 worth of equity in real estate used as a primary residence $2,775 of equity in a vehicle $1,150 of jewelry $1,750 of tools of a trade $9,300 (aggregate) of household goods and furnishings However, what you're allowed to keep depends largely on which state you live in. The federal exemptions may vary widely from those mandated by your state's laws, and your state determines which set of exemptions you can use. The proceeds from any sale of your assets are distributed to your creditors as satisfaction of your debts. If there's not enough to repay everything, the remaining portion is discharged; you are no longer responsible for repaying it. If you have no assets, or if their value is such that the court requires no sale, your creditors receive no payment, and your entire eligible debt will be fully discharged. However, not all debts may be discharged in bankruptcy. Generally speaking, you'll still be held responsible for tax debts, federally subsidized student loans, alimony and child support payments, debts resulting from fraud, and debts incurred by either willful or malicious injury to others. The debt that you discharge in Chapter 7 will most likely be credit card balances and other unsecured debt. If you also go bankrupt against a secured debt (a mortgage or a car loan, for example), you'll lose the collateral (the house or the car) as at least a partial satisfaction of that secured claim. Chapter 13 Perhaps you aren't insolvent. You have some money left over after meeting your living expenses; it's just not enough to pay back your debts in the way your creditors demand. And you don't want to have to sell the house. You might then consider Chapter 13 bankruptcy. Often known as a wage-earner's plan, Chapter 13 doesn't require that you sell your assets to satisfy your creditors. Instead, you pay back some or all of your debt through the court over a 36- to 60-month period. (The preferred term is 36 months.) You must propose to repay your unsecured creditors a percentage of the debt at least equal to what they'd get if your nonexempt assets were sold as part of a Chapter 7 proceeding. If you successfully complete the repayment schedule, the remaining unpaid unsecured debt is discharged. A Chapter 13 bankruptcy may also be used to forestall and ultimately prevent foreclosure on real property, such as your home. You must be able to make your normal monthly mortgage payments directly to the lender; you may then use the Chapter 13 plan to catch up in full on the back payments due on your mortgage. If you complete the repayment schedule successfully, your mortgage will again be current. How to know when to go bankrupt How do you know if you should go bankrupt? You don't want to panic and file too quickly, only to find out that you didn't need to. Still, in the long run you may not be able to afford to do what you want to do, and your attempts to repay old debt may be undermining your ability to make a fresh start. Is your inability to repay your debt due to a temporary setback? Perhaps you lost income due to unemployment or illness. If this situation will change for the better in the near future, you may just need some breathing room. Contact your creditors--if nothing else, once they understand your situation, they may offer you a temporary hardship program to help you avoid bankruptcy. Then again, your circumstances may not be temporary. Your income isn't going to go up in the foreseeable future, and if you cut your living expenses any further, you'll be eating macaroni and cheese every night of the week. Your pleas to restructure your debt either fall on deaf ears, or the relief you're offered isn't enough to help. Perhaps now it's time to consider bankruptcy. Life after bankruptcy A bankruptcy notation will appear on your credit report for 10 years. Although it's a serious blemish, you can still get credit during that time (but at higher interest rates), especially if you have a good income and no new bad-credit notations. Remember, you may not have gone bankrupt against all of your debts. You may still be making timely payments on a mortgage and a car loan, for example, or even on a credit card that you kept through the bankruptcy. Doing so helps establish your new track record, and the longer it's a good one, the more likely it is that new creditors will be willing to extend you credit.