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Don't be afraid to think about bankruptcy.  I always feel bad for someone that truly doesn't understand the benefit of declaring bankruptcy.  Most people are so far in debt and have no way out, but are still reluctant to seek advice from a bankruptcy attorney.  I fully believe that this is because of the stigma that big corporations have given bankruptcy.  Do you ever wonder who pays for those bankruptcy commercials that describe a life without credit if you go bankrupt?  It is the same businesses that will lose the money you owe them if you do declare bankruptcy.  They tell you that you will not get credit or any loans if you go bankrupt...LIES!  Most people will be able to get credit the day they sign all their debt away.

Let's look at it this way...who would you loan money to?  A family who earns $100,000 a year with no debt and crappy credit due to their fresh bankruptcy or the same family with so much debt that they can hardly meet the monthly payments?  EASY...the debt free family.  What most companies do is just charge you a little higher interest rate.  But, I would bet that you will not let yourself abuse credit again after going through a bankruptcy. 

MUST READ STORY I HEARD ABOUT:  There was a man who won the lottery for quite a few million.  He lived life to the fullest.  Fast cars and big houses and lots of parties were an everyday thing for him.  Problem was, he had an annuity and the payments were only about $500,000 a year for 20 years.  He ran his debt so high so quick that he eventually went bankrupt, declaring chapter 7 at the advice of a financial planner. (A planner like me)  After signing the papers to free himself of all the debt, he started spending like wild again.  The banks were quick to give him new loans due to the fact he was debt free.  (So much for not getting credit if you go bankrupt!)  To make a long story shorter, he ended up going bankrupt again. This time though, he learned his lesson.  He was running out of  checks and knew he had to plan wisely, which he did.

The above story is meant to show that even millionaires have their own problems.  The credit given to a person will be based on what the lender feels they will be able to handle.  They assess risk or default and credit records.  But make no mistake about it, they want to lend money...that is how they make their money.   

ABOUT CHAPTER 7 BANKRUPTCY:  Chapter 7 bankruptcy is the best bankruptcy out there!  BAR NONE!!!  It eliminates all your debts and gives the person a brand new financial life.  You even get to keep quite a bit of money and a certain amount of equity in your home.  There actually are quite a bit of things that you we be allowed to keep...you will be surprised!  That is the reason big corporations don't want you to go bankrupt.  You usually keep the goods and free yourself of their greedy high interest rate grips.  Below is a short list of things you keep...remember that is varies in each state:

Typical examples of property that you can keep are:

(A) Your residence, up to $20,200.

(B) A car, up to $3,225.

(C) Household goods and furnishings, clothing, appliances, books, pets or musical instruments up to $10,775, but no more than $525 per item.

(D) Tools of your trade, up to $2,025.

(E) The cash value of a life insurance policy, up to $10,775.

(F) Health aids.

(G) Your right to receive social security, unemployment, welfare, veteran’s benefits, disability, illness, alimony, support, crime victim’s reparations.

(H) To the extent necessary for your support, your right to receive life insurance for someone who was supporting you or to recover damages for such a person’s wrongful death.

(I) Your right to recover damages, other than for pain and suffering, for personal injury, up to $20,200.

Remember too that if you are married and file a joint bankruptcy, then the numbers are doubled! 

NOW THE BAD NEWS:  President Bush and congress bowed down to the credit card industry and restructured the bankruptcy laws in order to make it harder to declare chapter 7.  Since October 17, 2005 there has been a new means test that is done to see if you qualify for chapter 7.  It is a two step process.

STEP 1:  You need to have an family income that falls below your state's median income for your family size.  You can Google your state's median income to find out if you meet this criteria.

STEP 2:  We need to find your disposable income which is determined by IRS guidelines.  The object of this test is to find out if you have more than $100 a month disposable income.  (Disposable income is the money left over after paying all your bills.)  They base this on five years.  So if your disposable income is less than $6,000...you can file chapter 7 and free yourself of the corporate greed.  If have between $6,000 to $10,000 in disposable income over those five years, than they do another test.  They compare your unsecured debt to your disposable income to see if you can make significant payments to the creditors. (Credit cards companies most likely)  When your disposable income for that five year period is more than 25 percent of your unsecured, non-priority debts, than you will probably be forced into chapter 13 bankruptcy.  If it is less than 25%, than you win and should be able to file for chapter 7 bankruptcy.

Chapter 13 Bankruptcy:  This bankruptcy is used to help pay off some of your debts at lower interest rates and just better overall agreements.  You will basically have 5 years of payments that you will have to make according to what the bankruptcy courts decide.  If at anytime you fail to meet the requirements laid out by the bankruptcy court, your case can and most likely will be thrown out and you will be right back where you started.  The idea is to get through the five years and then the court will discharge the remaining debt if any and then you get your fresh start.  I can't stand this bankruptcy because it keeps you a slave to the credit card industry for five more years than what chapter 7 does.

COSTS:  Most bankruptcies will only cost a few hundred dollars upfront of course.  The savings could be in the tens to hundreds of thousands for only a few hundred. 

Final Thoughts:  This is just my opinion, but I would make sure to meet the state median if my family was in debt up to their ears.  If I was getting calls from creditors, I would just have my wife stop working for the allotted time needed so we qualified for chapter 7.  At the time of discharge, we could start fresh and have a great life.  Most people get into trouble due to unforeseen problems such as medical, car, and student loans.  They  should not be punished for a half a decade due to corporate greed.  The credit card industry doesn't have to charge close to 30% interest! Ridiculous!  

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