Some people who find themselves deep in debt feel that the only way out is filing for bankruptcy. This, however, is a very serious matter and is not a decision that should be made rashly. The debt elimination benefits of bankruptcy come at a high price.

Most people who are considering filing for bankruptcy are doing so because their debt has become uncontrollable. Individuals who declare bankruptcy do so under Chapter 7 or Chapter 13. Chapter 7 bankruptcy completely liquidates debt and any assets related to it. Chapter 13 bankruptcy is different. Instead of liquidating debt it postpones your payments and helps you plan how to pay back part of what you owe.

Credit is damaged as a result of bankruptcy proceedings for up to ten years. For those ten years, every time you apply for a line of credit your bankruptcy will show up on a credit report. This applies to both Chapter 7 and Chapter 13 bankruptcies.

In the past, people have taken advantage of the bankruptcy laws. For instance, people have been able to file more than once for Chapter 7 bankruptcy. They have used it as their own personal “debt eliminator”.

Each state decides on what assets they will exempt from being seized during a bankruptcy hearing. Knowing that, some may use available cash to purchase those items (homes, cars, etc.) in an effort to avoid payment and still retain the stuff they purchased. In this instance, creditors receive little or nothing from the bankruptcy settlement.

Laws have been changed in regards to the bankruptcy process and such misuse of the system is no longer possible. Instead of being chosen by the courts, now people who wish to file for Chapter 7 bankruptcy must meet stringent requirements. For example, they must earn less than the median income in their state. If a person has enough money on hand to pay for twenty-percent of their debt, they are not eligible for Chapter 7 bankruptcy.

These changes have made it so that more people file for Chapter 13 bankruptcy. In these proceedings, the court take into consideration a person’s financial situation and their debt in order to determine how much money they are realistically able to pay. Necessities like a rent or mortgage payment and utility bills are calculated and compared to standards that the IRS has set for Chapter 13 bankruptcy filers. After this, the actual amount to be paid is determined and the rest is considered exempt.

Now that the bankruptcy process has become more complicated than before, lawyers are charging more to handle the proceedings involved. The extra cost involved also makes people think about their situation seriously before filing. Credit counselors can help you to make a plan for getting rid of debt without going through the bankruptcy process.

Bankruptcy should always be a last resort. While it will give you a clean slate, it comes at a price.

Tags: Credit Score