First Person: Is Personal Bankruptcy the Answer?

Personal bankruptcy is often sought as a quick fix to mounting financial debt. However, personal bankruptcy is anything but a quick fix. There are far and long-reaching consequences for an individual who chooses to enter into bankruptcy. There are two types of personal bankruptcy, chapter 13 and chapter 7. No decision should be made without thoroughly researching all aspects and considering the advice of a legal professional.

Chapter 13 bankruptcy could be thought of as a "court-ordered" debt consolidation loan. You make payments to a trustee, who then in turn makes distributions to your creditors. It is possible through chapter 13 bankruptcy to obtain a payment reduction on secured debts. Chapter 13 bankruptcy can help stop home foreclosure and wage garnishment proceedings, but you must go through a court approved credit counseling program before being eligible to apply for chapter 13 bankruptcy.

Chapter 7 bankruptcy is far more involved than chapter 13 in that your personal assets are liquidated and turned over to the court to pay off your creditors. The court may determine that a portion of your debt will be discharged, meaning that you will not be responsible for repayment of the debt. As with chapter 13 bankruptcy, you must go through approved credit counseling before being eligible to file.

There are fees for filing for both chapter 13 and chapter 7 bankruptcy, usually in the $200 to $300 range. In certain cases, if your income falls below the poverty level, the court may waive the filing fee. Documentation must be provided to the court about your personal financial affairs, along with the current year's tax returns, current income and expense statements, a list of creditors and the nature of their claims against you.

Bankruptcy is a solution of last resort. Do not think of it as a quick fix for debt problems. A bankruptcy can remain on your credit report for up to 10 years, so other alternatives should be considered before filing for bankruptcy. Reputable counseling services, such as the Consumer Credit Counseling Service, can help you enter into a debt management program and teach you personal finance skills such as developing a personal budget.

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