How to know when it’s time to file bankruptcy?

As appealing as it may sound, there is no magic formula for deciding whether or not you should file for bankruptcy. Any qualified, experienced bankruptcy attorney can tell you that each person’s case is unique to her or him. In general, though, there are some basic tenets that can help you decide if the time is right for you to file for bankruptcy protection. Here are some questions to ask yourself when making this important life decision.

WHAT ARE MY OPTIONS?
Most individuals decide between Chapter 7 and Chapter 13 bankruptcies. Chapter 7 wipes out most debts fairly quickly, though you stand to lose some personal property. Chapter 13 requires a repayment plan based on your income over three to five years. Each form has requirements you must meet and each state has its own rules regarding exemptions.

WILL ALL MY DEBTS BE FORGIVEN?
Both chapters prohibit discharge of debts such as alimony, child support and certain tax debts. Mortgage payments are not forgiven, though you may find it easier to make those payments once other debts are wiped out. Most if not all credit card debt will be forgiven. Check with a bankruptcy attorney familiar with your state’s requirements to ensure the debts you have can be erased in bankruptcy.

WHAT HAPPENS TO MY PROPERTY?
Whether you get to keep your home depends on the equity you have in it. If equity is high, the trustee may decide to sell it to satisfy some of your debts. If you want to keep your home in this case, then Chapter 13 should be considered and your mortgage payments made a part of your repayment plan. What happens to other property, such as your car, depends on individual state exemption laws. Chapter 7 only protects certain types of property, so be sure to understand your rights before filing, as you’ll want to keep what you need to survive.

WHAT HAPPENS TO MY PENSION?
Most pension plans, including 401(k)’s and IRA’s, as well as life insurance policies, are protected in both filings. Check your state’s requirements and speak with an expert if necessary.

Finally, you don’t necessarily need bankruptcy protection if you have nothing that a creditor with a judgment could take. However, if your financial situation keeps you up at night and is causing undue stress, filing now may be a good choice for your mental, as well as financial, health.

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