Declaring Bankruptcy
Should I Declare Bankruptcy?
Bankruptcy: It's a scary word. Obviously you want to avoid declaring bankruptcy if at all possible. But if you find yourself in a dire situation where your debt is so out of control there's no getting out of it, declaring bankruptcy might be the only option.

Many people associate bankruptcy with money mismanagement; however, sometimes unexpected circumstances put you in a compromising financial situation. Often, these are circumstances beyond your control. In addition to seriously overextending your credit, common reasons for filing bankruptcy include:
  • You've been unemployed for a long time and cannot find adequate work to make the income necessary to cover your debt.
  • You suddenly incur large medical expenses that you cannot cover.
  • You experience marital problems that put a strain on your financial situation.
  • You incur other unexpected expenses that you cannot afford to cover.
Declaring bankruptcy affects your ability to purchase a home, because lenders are reluctant to loan money to people with bad credit. If you manage to get a loan, you will pay higher interest rates.

Bad Credit and Home Loans
There is a whole segment of the mortgage industry that specializes in lending to people with less-than-perfect credit reports. They offer "B" paper loans, as opposed to the standard "A" paper loans offered to buyers with good credit.

"A" paper lenders typically need to see that the buyer has made 24 months worth of on-time mortgage or rent payments. If you've recently been through a bankruptcy, it's unlikely you'd be able to show that. "B" paper loans provide an opportunity for home owners to demonstrate their ability to pay on-time mortgage payments. They include 2/28 and 3/27 loans, where the number before the slash refers to the number of years that the initial rate is fixed. After that time period, the rate changes, or adjusts, on a predetermined schedule, such as every 6 months, for the remainder of the loan. The adjusted rate is calculated using a mathematical formula based on the U.S. bond market. These loans usually have a two-year payment penalty which means you cannot refinance during that time. The benefit of a "B" paper loan is that you are given two years to demonstrate your ability to make regular payments. After those 24 payments, lenders will be more willing to qualify you for "A" paper loans with lower interest rates.

The other good news is that the market for "B" paper loans is very competitive, so although your interest rate will probably be higher than if you had an "A" paper loan, you can still shop for good rates within the "B" paper category.

Chapter 13 or 7?
If you've tried every cost-cutting measure possible and CCCS can't help, consider filing Chapter 13 bankruptcy. You are able to file Chapter 13 if:
  • You reside in or have a business or property in the U.S.
  • You have a regular source of income and owe less than $290,525 in unsecured debts and less than $871,550 in secured debts.
  • Corporations and partnerships are unable to file Chapter 13.
The advantages of Chapter 13 include a slightly better credit standing, and five years to repay your debt. A Chapter 13 bankruptcy remains on your credit history for seven years after you have repaid all your debt.

Chapter 7 is less desirable credit-wise, but you are out of bankruptcy in six months and you are not required to pay off any debt. However, a Chapter 7 filing remains on your credit history for 10 years from the date of filing.

Alternatives to Bankruptcy
Despite the drawbacks, bankruptcy might be the only way to get out of overwhelming debt. However, there are other ways to handle debt that do less damage to your credit and are worth a try, before going down the path toward Chapter 7.
  1. Out-of-control debt requires drastic measures. Now's the time to alter your lifestyle and trim your budget as much as possible. Sell a second car and try public transportation. Eliminate frivolous expenses like take-out food. Do without your cell phone for a few months, and cancel your cable service. There are many ways to cut costs that you may not have considered.
  2. If your budget's already as trim as can be, look for other sources of money. Perhaps you can borrow some equity from your home. Ask relatives and friends for help; they might be willing to loan you some money until you're back in the black. Sell off some of your valuables: jewelry, expensive electronics, antiques. Or cash out on your 401K plan-you can rebuild your savings later when your debt is under control.
  3. It's not a desirable option, but selling your house may be the only way to keep from going bankrupt. Use the proceeds to pay off your debt and rent a home or apartment until you can get back on your feet.
  4. If these cost-cutting measures will not make a dent in your debt, contact the Consumer Credit Counseling Services (CCCS). This organization will help you pay off your debts as if you were in a Chapter 13 bankruptcy, but it doesn't actually require you to file for Chapter 13

Disclaimer: The above information is not intended as legal advice. Different states have different bankruptcy laws, and you should consult a lawyer to learn the legal specific for your particular bankruptcy case.
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