When Is Bankruptcy the Right Choice?

By December 14, 2012Bankruptcy, Personal Finance

Filing for bankruptcy is never an easy decision and should only be considered as a last resort. Unfortunately, because of the long-term unemployment, the housing crisis, and the recession, more people are facing that last resort than ever before. Chapter 7 bankruptcy is a formal judgment that releases you from most of your debts.

If most of your debt is from unsecured credit cards or a mortgage that you can no longer afford, obtaining a judgment of bankruptcy may be your only option if you are unable to find work, find a short sale buyer, or work with your bank to obtain a home refinance. If your creditors are attempting to seek judgment against you so that they can garnish your wages or attach your property, bankruptcy may be your only option.

There are certain debts that you cannot include in bankruptcy:

  • back child support
  • student loans, in most cases
  • income taxes owed for the last three years
  • recent credit purchases or cash advances

In other words, you can’t go out, max out all of your credit cards, and then file bankruptcy. The court will allow those debts to survive the bankruptcy.

If you have cosigners on your loans or credit cards, they may be held responsible for your debt. For example, if you maintained a credit card that was in your name and your ex-spouse’s name, and you file bankruptcy, the creditor can try to collect the debt from your ex-spouse.  While some property may have to be surrendered, you are allowed to keep certain items:

  • your vehicle (if you have a loan on your vehicle you will have to reaffirm the debt to keep it)
  • clothing (but not minks or other high value items)
  • some household furnishings and appliances
  • some jewelry
  • your pension
  • tools for your business
  • public benefits such as TANF or SSI that are in your account

You may be required to surrender prized possessions, such as expensive collections, heirlooms, second vehicles, and second homes; you will likely be required to surrender most cash, stocks, and bonds. More importantly, a judgment of bankruptcy will remain on your credit report for up to ten years, making it difficult for you to establish credit, even more difficult to buy a home, and often impossible to get viable interest rates on loans. There is life after bankruptcy, but it can be tough. Before considering bankruptcy, consider alternatives that will be less damaging to your credit. Ovation may be able to help. Contact us for a free evaluation.

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