Decide If Bankruptcy Is Right for You

by Albin Renauer, J.D.

Is bankruptcy a good idea or not? Here are some things to consider.

1. Learn about it.
For individuals, there are two main kinds of bankruptcy:

• Chapter 7 -- a bankruptcy where many, if not all, of your debts are cancelled outright in a short three- to six-month process. (See An Overview of Chapter 7 Bankruptcy.)
• Chapter 13 -- a bankruptcy where you use your income to make payments on your debts over the next three to five years. (See An Overview of Chapter 13 Bankruptcy.)

2. Consider simpler alternatives.
Things may not be as bad as you think. You may be "judgment proof" or you may have options you aren't aware of. See Alternatives to Bankruptcy.

3. Make sure you are you eligible.
You may be prevented from filing for Chapter 7 bankruptcy if you have enough income to repay your debts in a Chapter 13 plan. (See Who Can File for Chapter 7 Bankruptcy.) Or you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low. (See Are You Eligible for Chapter 13 Bankruptcy?)

4. Learn which debts won't be cancelled.
Some debts, like child support obligations, cannot be wiped out in bankruptcy. Learn more in What Bankruptcy Can and Cannot Do.

5. Consider what will happen to your home.
Bankruptcy won't relieve you of your obligation to pay your mortgage, but it might make your mortgage easier to pay by getting rid of other debts. If you have substantial equity in your home, you might lose it if you file for Chapter 7, depending on how generous the exemptions laws are that are available to you. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.