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By David Luhman on Sun, 05/10/2009 - 00:02


Bankruptcy chapters

For individuals, there are two forms of bankruptcy. Chapter 7 means that most of your unsecured loans are discharged, so you can get rid of all that credit card debt. Chapter 7 may even sound like a good deal because in many states you'll still be able to keep many things like your home equity, an automobile, personal belongings and money in retirement accounts.

The other form of individual bankruptcy, Chapter 13, is a repayment system. You still have to pay most everything back, but you do it over a number of years. You also usually get some forgiveness of interest and penalties that you owe. Filing for bankruptcy also prevents creditors from hounding you.

Of the two forms Chapter 7 may seem better because of its immediate debt forgiveness. But the debt is forgiven, not forgotten.

The Chapter 7 bankruptcy stays on your credit history for 10 years. This will limit your ability to start your own business or buy a home for a long time.

Chapter 7 does not discharge certain debts. Even if you file for bankruptcy you still must pay alimony, child support, student loans, taxes and money borrowed immediately before filing for bankruptcy.

Alternatives to bankruptcy

Instead of putting a big blemish on your credit history, it's probably better to work your way out of your troubles.

See if you can work out something with your creditors. You'd be surprised. Your creditors aren't in the business of writing off bad debt, but you might be able to get a lot of interest taken off your account as long as you make steady payments.

There's also the Consumer Credit Counseling Services, which is a non-profit organization funded by credit card companies. They'll generally tell you to not file for bankruptcy, but you might want to call them, maybe anonymously.

But beware of independent so-called "credit counselors" who will charge you hundreds of dollars and provide you with little real service.

Freeing up excess cash

But how do you find money to work out from under a mountain of debt? In addition to a second job, you could work overtime or ask your spouse or children to work.

You also could cut your other expenses dramatically, take out a low-cost home equity loan or borrow against your 401(k) assets.

If you qualify, you could also apply for an advance Earned Income Tax Credit payment, or even hit up your relatives for a loan.

None of these are attractive alternatives, but chances are you'll do better by paying off high interest, unsecured credit card loans, and replacing them with cheaper, secured loans. Otherwise, the money you'll pay in interest will kill you.

If you're on the right side of lending money, you can become quite wealthy over time. If you're on the wrong side of borrowing money, you'll dig yourself into a hole from which you'll never escape.

Hopefully, one way or another, you'll be able to get out of your immediate bind of being deeply in debt. But to climb out of the hole entirely, and stay out, you'll probably have to come up with a budget and cut your spending.

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