When should you file bankruptcy?

When should you file bankruptcy?
Leah Gliniewicz

Will bankruptcy lead you to financial Nirvana or debt damnation?

In these plentiful times, the number of bankruptcy filings has dropped for the first time in four years. In 1999, 1.3 million bankruptcies were filed, down 8.5 percent from the year before, according to the Administrative Office of the U.S. Courts. Of those, more than 97 percent were personal bankruptcies.

For those who have run up sizable debts -- or worse yet, fallen behind on the mortgage or other debt payments -- bankruptcy may be the means to financial salvation. But, here are some points to consider.

Weigh the costs and benefits of filing

What bankruptcy can not do for you:

Eliminate certain rights of secured creditors.

Discharge types of debts singled out by the federal bankruptcy law for special treatment.

Protect all co-signers on their debts.

Discharge debts that are incurred after bankruptcy has been filed.

Source: National Consumer Law Center Inc.

There are a lot of factors that come into play: the amount owed, the property owned, state laws that say what property can be kept, how much you're being harassed by creditors and how much it affects you personally, says Henry Sommer of Philadelphia, author of Consumer Bankruptcy. He says to consider how much it will help, the costs and the alternatives.

"It's a bad solution if it's not going to solve the problem," Sommer says.

Bankruptcy may not help much if you have large tax debt or student loans, which are difficult to impossible to discharge. If you've suffered a major economic blow such as an uninsured hospital stay, divorce, or job loss and no longer have the ability to make payments, bankruptcy may be an appropriate remedy.

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Consult with a bankruptcy attorney to sort out your options. An initial lawyer consultation is usually free. After that, costs can range from $500 for a Chapter 7 to $2,500 for a Chapter 13. People pay for Chapter 7s in full before filing. Chapter 13 legal fees are paid during the time the bankruptcy plan is in effect, according to David Light, senior managing editor of the trade publication Consumer Bankruptcy News in Palm Beach Gardens, Fla.

"The bottom line is if you can't pay your bills and belt tightening isn't going to give you the ability to pay your bills, then bankruptcy is probably your best option," Light says.

Look at your exempt and non-exempt property

What bankruptcy may do for you:

Eliminate legal responsibility for many of your debts and to get a fresh start.

Stop foreclosure on your house or mobile home and allow you to catch up on missed payments.

Prevent repossession of your car or other property or force the creditor to return property after it has been repossessed.

Prevent termination of utility service or restore service if it has already been terminated.

Lower the monthly payments on some debts, including some secured debts such as car loans.

Challenge claims of certain creditors who have committed fraud or who are otherwise seeking to collect more than they are legally entitled to.

Source: National Consumer Law Center Inc.

If property is exempt, you get to keep it. If it is non-exempt it is taken to pay creditors. Each state has different exemption laws. If you're looking to save assets such as a car or house, consider filing for Chapter 13 bankruptcy, which is a reorganization in which you pay creditors back over three to five years.

"Chapter 13 is one of the fastest growing areas of consumer bankruptcy because of the flexibility," says Joel Aresty, a Miami lawyer who is a member of the American Bankruptcy Institute, a nonprofit bankruptcy research and education group in Alexandria, Va.

Chapter 7, on the other hand, liquidates your non-exempt assets. The proceeds are used to pay your debts. Any debts that are left over are forgiven.

According to Nolo.com, a consumer law Web site, chapter 7 may not be a good idea if:

You received a bankruptcy discharge within the past six years.
You have a co-signer on a loan who may be liable for the debt even though you file and no longer are.
You have the ability to pay debt within 3 to 5 years if a judge decides you have enough to repay your debts in a Chapter 13.
You want to prevent seizure of wages or property; defrauded your creditors or attempt to defraud the bankruptcy court.

In 1999, 904,564 people filed for Chapter 7 bankruptcy and 376,311 filed for Chapter 13, according to the Administrative Office of the U.S. Courts.

Bad timing can make you a loser

If you want to save property like a car or house, and you've missed payments, it may be a good idea to file for bankruptcy right away before the car is repossessed or the house is foreclosed.

"It's a heck of a lot easier to do before they're gone than it is to get them back," Consumer Bankruptcy News' Light says.

Examples of emergency filings would be if your wages are garnished or if your bank account is frozen. "There are situations where you absolutely have to file today," Aresty says.

You will find after a bankruptcy that your debts are gone but not forgotten. The bankruptcy will remain on your credit report for 10 years.

Chapter 13 is better if:

You have received a Chapter 7 or Chapter 13 discharge within the previous six years.

You have valuable non-exempt property.

You're behind on a mortgage or a car loan. In Chapter 7, you'll have to give up the property or pay for it in full during your bankruptcy case. In Chapter 13, you repay the arrears through the plan and keep the property by making payments required under the original loan.

You have debts that cannot be discharged in Chapter 7.

You have co-debtors on personal (non-business) loans. In Chapter 7, the creditors will go after your co-debtors for payment. In Chapter 13, the creditors may not seek payment from your co-debtors for the duration of your case.

You feel a moral obligation to pay your debts, you want to learn new money management or you hope new creditors might be more inclined to grant you credit after a Chapter 13 than they would after a Chapter 7.

Source: Nolo.com Inc.

How much property will you have to give up?
Items you can typically keep (exempt):	Items you must typically give up (non-exempt):
Motor vehicles, to a certain value Reasonably necessary clothing Reasonably needed household furnishings and goods Household appliances Jewelry, to a certain value Life insurance (cash, loan value, or proceeds) to a certain value Pensions Part of the equity in your home Tools of your trade or profession, to a certain value Portion on unpaid but earned wages Public benefits (such as welfare, Social Security) accumulated in a bank account	Expensive musical instruments (unless it's your livelihood) Stamp, coin and other collections Family heirlooms Cash, bank accounts, stocks, bonds and other investments A second car, truck A second vacation home
Source: Nolo.com Inc.