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Debt Management Guide 2008
Bad credit
Bad credit can hurt a consumer in many ways. Understand how debt negotiation and bankruptcy work.
Bad credit
Can bankruptcy help you?
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"Interestingly enough, more people report getting credit a few years after a Chapter 7 than after a Chapter 13," says Sommer. That's because after a Chapter 7, your debts are gone. With a Chapter 13 (reorganization), you're paying those debts (all or in part), over the next three to five years.

Should you file?
If you're trying to make the decision of whether or not to file, there is one big question you want to ask yourself: Have you fixed the problem that caused the financial mess or is it still ongoing?

Unless you've stopped hemorrhaging money, or have a special circumstance (like pending foreclosure), it may not be the right time to file for bankruptcy. If you clear away or reorganize your current obligations but keep taking on debts the same way as before, you'll end up back where you started.

Bankruptcy is a better alternative for people who have gone through a financial crisis, come out the other side, and -- except for the bills incurred in the interim -- solved the financial problems.

So what do you do if you're having financial trouble and are considering the bankruptcy option? First, look at your repayment options.

"I think people should seriously consider a repayment plan," Garkey says. One option: stopping in for a visit with a genuine, nonprofit financial counseling service. In some cases, your local credit union will be able to refer you to a true consumer-centered service.

Always weigh a counselor's advice against what you know you and your family need. If they want you to sell your car and take the bus -- and you live an hour from the office -- that's not practical. But if they tell you to sell the SUV for something with lower monthly payments that offers better mileage, that's worth considering.

You might also be able to deal directly with the creditor, especially if the problem involves medical expenses. Sometimes the hospital will accept a settlement offer, says Garkey.

"The worst thing to do is ignore it, because they may work with you," she says.

If repayment is not an option (you either don't have the money for any type of repayment or the creditors aren't willing to work with you or a counseling service), then you probably want to talk to a bankruptcy attorney.

Consumer credit counseling exists "to help people avoid bankruptcy," says Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling based in Silver Spring, Md. "But probably every day in our offices we recommend bankruptcy" because it's the only option for some people.

"It should not be your first step; it should be your last," she says.

So how do you know when you're ready to consider it? "When everything else you do is a Band-Aid," Cunningham says.

"People have financial hiccups," she says. But if the problem persists long-term, "that's why bankruptcy was designed."

-- Updated: June 16, 2008
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