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What you need to know about Bankruptcy
Bankruptcy is a federal court process that allows
consumers to eliminate overwhelming debts or establish a
Jun 26plan to repay them. Bankruptcy is a personal decision – most
people file because of unemployment, medical expenses, marital problems, or
other excessive debt. Though bankruptcy may give you a way to erase
financial obligations, there are long-term negative impacts on your ability
to obtain new credit, find a job, get insurance, or rent a place to live.
Let’s start with the different types of
bankruptcy. For consumers, Chapter 7 bankruptcy forgives all your unsecured
debt, aside from child support, divorce settlements, back taxes, and other
court-ordered fines. A court appointed trustee will take possession of your
assets to pay your secured debt. Chapter 13 bankruptcy establishes a
repayment plan, where the court approves your plan to repay all or part of
the money you owe in installments over an agreed-upon time period, usually
three to five years.
A new law passed in April 2005 requires all
consumers to participate in pre-bankruptcy credit counseling and
post-bankruptcy money management training. In addition, the court has
placed restrictions on eligibility for Chapter 7 bankruptcy. If your
average monthly income over the last six months is more than the median
monthly income for your state, and you can afford to pay at least $100 a
month towards your debts, you are only allowed to file for Chapter 13
bankruptcy.
Most people who file for bankruptcy don’t realize
the impact it will have. It will affect your credit history for 7-10 years,
so you might have trouble getting new credit, a job, insurance, or even a
rental space. If you are behind on bills but not overwhelmed by debt and
collection calls, try these strategies:
- Find ways to earn more money and pay down your
debts.
- Keep a budget – track your spending.
- Downsize your lifestyle – think about selling
your home or car to live more simply.
- Start saving – build up an emergency fund for
the tough times.
Most importantly, research your options.
Bankruptcy laws were established to give people a fresh start, but it may
not be the best answer.
Evelyn Huang is the Microloan Program Manager at
Lenders for Community Development, a non-profit lending agency in San Jose,
CA. |
