Before you take the step of filing for bankruptcy, you may want to think about all of the bankruptcy options available to you. There are several types of bankruptcy, as well as alternatives to filing, that you might consider.
The first thing you should consider is whether to file at all. If you have a lot of credit card debt, you may be a candidate for bankruptcy. but if your debt is mostly all student loan debt, for example, bankruptcy won’t help you because you can’t discharge student loan debt in bankruptcy. You also can’t discharge obligations such as back taxes or support payments to a spouse or child. If you have a lot of unsecured debt, you might pursue bankruptcy. But if your debt is secured, such as a home mortgage, and you want to try to save your home, you will want to possibly use bankruptcy as a way to set up a payment plan and avoid foreclosure.
Once you decide to file, your bankruptcy options as an individual are mainly two. First there is a Chapter 7 bankruptcy, where you are permitted to discharge most debt. This option however is usually limited to people without a regular income. If you are working, you will have to pass a “means test” to determine whether your living and other expenses coupled with debt payments are just not possible given your income. However, if you have regular income and you do not pass the means test, the court may move your case into Chapter 13 bankruptcy, since you have some income to pay your debt. In this chapter, you will set up a repayment plan that lasts from three to five years. This can help you save your home, or other assets you don’t want to lose.
Chapter 13 is fairly detailed in that you will have to provide a lot of detail about your present expenses, your income, your debt payments, and so on. It is also not a guarantee that you will be able to keep the assets you choose. For either type of filing, you will also have to do credit counseling prior to filing. During that process, you may find there are other ways to pay down your debt and not have to file for bankruptcy.
How do you decide whether to file or not? One rule of thumb is that is your total debt is greater than your annual income, you are probably a candidate, since it will take such a long time to pay off your debt after your regular living expenses. Some financial advisor however say you should do everything you can to avoid filing for bankruptcy, since it will damage your credit for a long time – it’s on your credit report for ten years. Pick up a second or third job, slash your living expenses, and work out repayment plans with your creditors on your own. This is one of your legitimate bankruptcy options, and can even help you prevent having serious credit problems in the future.