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By KK Mounsey

Does bankruptcy solve or cause financial problems?

When you're struggling with debt and you can't see the light at the end of the tunnel, the idea of filing for bankruptcy seems like a pretty good option. You have two choices: you can make arrangements to pay your debt over time under the court's protection or you can have certain debts wiped out, depending on which route you choose to take.

If you're considering bankruptcy as a way out, you must be aware that it's more than just looking at your debts and determining whether or not you can wipe them away. You must also keep in mind that bankruptcy, though it's only for a short period of time, will leave a mark on your life.

The truth is that bankruptcy ruins your credit and can make it extremely difficult for you to obtain/keep credit cards and bank accounts. In addition, it can cause you to lose valuable possessions and make it very difficult for you to rent/buy a home, rent/buy a vehicle, and even get a new job. A good financial advisor will tell you that it should only be done as a last resort and only under the guidance of an attorney after you have exhausted all other options.

Two types of bankruptcy

You probably already know that there are two forms of bankruptcy. The one that's best for you depends upon your assets and property and what you owe versus your income, along with a few other factors.

Filing Chapter 13 will allow those with a steady income to retain assets that would otherwise be lost during this process. The court approves a repayment plan where the client gives up a portion of their income in lieu of giving up property. Debts that must be repaid include mortgages, taxes, child support, car loans and school loans.

On the other hand, filing Chapter 7 allows you to erase nearly all of your debt. The bankruptcy trustee collects any non-exempt property and sells it off, which will help pay off your debtors. However, you must keep in mind that not all debts will be erased, such as child and spousal support. The disadvantage to Chapter 7 is that you risk losing any property that you transferred to keep it from being taken. The court can undo the transfer. Chapter 7 does not include a repayment plan.

Both of these filings are administered by a trustee who is appointed by the US Department of Justice to investigate the financial standing of each debtor. They can sell any non-exempt assets and will hold what is known as a "meeting of creditors" about a month after your case is filed. Each case is assigned a judge who will be called upon to make rulings as necessary. While it's true that an attorney is not required, you may want to speak with one to find out about the necessary paperwork.

Typically, Chapter 7 takes about three months to complete, but it will stay on your credit report for ten years. Depending upon your circumstances, Chapter 13 will last three to five years and stay on your credit report for seven years. Before your case can be discharged, you will be required to submit to completion of a financial management course from an approved agency.

When you're facing overwhelming debt with no way out, you may think bankruptcy is your best option. However, you must keep in mind that this is something that will have a long-term effect on your life. It can potentially ruin you and make it quite difficult to rebuild your credit.

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