Bankruptcy Facts

While bankruptcy may be a life vest for most people drowning in debt, choosing to file is never an easy decision. For some financially distressed debtors, bankruptcy may not always be the best option.

Several events can cause individuals to lose control of their financial situation. Divorce, job loss, lawsuits, foreclosures or credit card debt can drive a person over the financial edge. Generally, filing bankruptcy allows people who are having financial difficulties to wipe out their debts. In most cases, people filing bankruptcy can keep all of their property. Thus, bankruptcy helps people wipe out their debts, keep their property and get a fresh start.

Many people filing for bankruptcy have accumulated a huge credit card debt and in some cases are trying to prevent a foreclosure on their home.

Ten Years of Bad Credit

Although bankruptcy can wipe out all unsecured debts through an order of the court called a discharge, bankruptcy information remains on a credit report for 10 years. Any negative information that appears on a credit report may prevent an individual from buying a home or car, or from obtaining a credit card or loan.

Bankruptcy serves two main purposes:

1. It gives creditors a fair share of the money that the debtors can afford to pay back.

2. It gives debtors a fresh start.

There are two ways in which bankruptcy can provide for payments to creditors and a discharge for debtors – Chapter 7 and Chapter 13.

Chapter 7

In a Chapter 7 bankruptcy, known as the liquidation chapter, debtors give up certain property when they file for bankruptcy. A trustee appointed by the court sells the property and uses the proceeds to pay the creditors. A trustee is usually a lawyer or accountant who specializes in bankruptcy cases. The debtor receives a discharge shortly after the case is filed.Debtors are allowed to keep any money earned after filing for bankruptcy, as well as most other property obtained after the filing. Under this chapter, all unsecured debts are wiped out. These debts include credit card bills, medical and legal fees, utility bills, deficiency balances (the difference between the amount owed and the value of the property), loans from friends and some student loans.

There are some debts that cannot be discharged through the bankruptcy process. These debts, known as non-dischargeable debts, include alimony, child support, some student loans, certain federal, state and local taxes, debts from fraud, larceny, theft, and fines and penalties for items worth over $1,000.

Chapter 13

Chapter 13 is designed for individuals with regular income who want to pay their debts but are currently unable to do so. The purpose of this chapter is to help individuals, under court supervision and protection, to propose and carry out a repayment plan under which creditors are paid over an extended period of time. Under this chapter, debtors are permitted to repay creditors in full or in part, in installments over a three-year period.

Try the following measures before declaring bankruptcy:

• Control spending, either with the help of a credit counselor or a debt consolidation plan.

• Set up repayment plans with creditors.

• Get credit counseling and learn about financial management.

Most experts advise against filing for bankruptcy and recommend finding alternative ways to pay off debt. Most consumers should try paying off their debts through a repayment plan before choosing bankruptcy. These types of programs will teach the consumer ways to reduce expenses and save money.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email


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The thought of personal bankruptcy is very frightening, however over 5.4 per 1,000 people have filed for bankruptcy last year, and this rate has been growing at an average of nearly 7 percent. Researchers have determined that the primary cause of personal bankruptcy is uncontrollable levels of consumer debt oftentimes coupled with an unexpected event, such as a major medical expense not covered by insurance, the loss of a job, divorce or death of a spouse.

According to economists’ surveys, the classic bankruptcy filer is a blue collar, high school graduate who is the head of a household in the lower middle-income class with heavy use of credit. In order to protect both debtor, and creditor, laws were enacted to provide equal, and fair measures to satisfy the objectives of all parties. The primary purpose of the laws of bankruptcy are: (1) to give an honest debtor a fresh start in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has property available for payment.

There are two types of structured plans for filing for personal bankruptcy, Chapter 7 or Chapter 13. Over two-thirds of personal filers choose Chapter 7 bankruptcy. Basically Chapter 7 requires the debtor to liquidate all non-exempt assists, and have them distributed among creditors. Some examples of exempt assists include equity in a primary residence, and a retirement program. On the other hand, Chapter 13 does not require liquidation, rather a debtor agrees to a specific payment plan, whereby a portion of any unsecured debts is paid, and the balance is forgiven. It must be stressed, that under both plans, certain debts are ineligible for bankruptcy protection. These debts include government student loans, child support, alimony, and income tax debt. These must be paid back in full.

Some analysts are concerned that this unprecedented level of debt might pose a risk to the financial health of American households. In an attempt to reverse the increasing trend in personal bankruptcy, the federal government has recently implemented sweeping bankruptcy reform legislation. On March 10, 2005, the Senate passed S. 256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. On April 20th, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Act of 2005). This act makes filing for bankruptcy more difficult through income-means testing, tougher guidelines for the homestead exemption, increased lawyer liability and required credit counseling.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email

Start Fresh After Bankruptcy

Getting back on your feet following bankruptcy can be a very difficult task. You’ll be starting from scratch. It’s critical to your future financial success to make sure you don’t make the same mistakes .

To ensure you make a “fresh” start, you need to think and analyze your previous spending habits. What really lead you to go bankrupt? Analyze your expenses, the way you handle your money and of course your lifestyle. Do you have to live a lavish lifestyle? And the major question is can you afford that kind of living? What are your major purchases recently? Asses your situation, and the causes that made you experience bankruptcy.

After that, make a plan on how recover and live without going into a financial difficulty. The primary thing that you have to do is to reestablish your credibility, especially to financial institutions. You must regain a good financial standing status. Start to build up resources. Save your money and put it to good use. Don’t splurge on extravagant items. Keep in mind what drove you to bankruptcy, your too much spending attitude. You have to change the way you regard your expenses.

If you use a credit card, be sure to pay on time, in full. Make sure also that when using credit cards, it’s for emergency purposes and not for luxurious items. Keep only one or two credit cards. A lot of credit cards may lead to temptation. You don’t want to end up into the same situation again. Having a savings account is also a good option because it means less reliance on your credit card purchases. You’ll learn how to set aside cash in your account for large purchases.

Budgeting is also very important because it teaches you on how to manage your money. Stick to your budget!.

Some lenders are willing to offer housing loans to people who have declared bankruptcy. If you find a financial company to hold your home mortgage, make sure you pay them promptly. Prove to them that you’re worth their risk.

Bankruptcy can bring stress to your life, but there is a lesson to be learned. You’ll know now how to deal with your monthly expenditures. Your spending habits will change for the better and you’ll live a life without worries. Keep in mind, it’s fine to have debts as long as you know how to manage your resources and pay your creditors.