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Five Benefits of Bankruptcy

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Admitting you're under water is the first step toward recovery.

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Bankruptcy is a choice most of us hope to avoid. But with the unemployment rate north of 10%, layoffs and pay cuts are now the norm and many Americans are actually finding relief by recognizing their inability to pay off their debts.

The number of bankruptcy filings has skyrocketed in the past year.

In the 12-month period ending September 30, 2009, 1.3 million non-business bankruptcy petitions were filed, up 30% from one million non-business filings over the previous 12 months, according to the latest data from the administrative office of the US Courts.

Business bankruptcies are on the rise, too. Lehman Brothers, Circuit City, and some 59,000 other businesses filed for bankruptcy protection in the 12-month period ending September 30, 2009, up a whopping 52% year-over-year. Some, such as Lear Corp. (LEA), General Motors, and Charter Communications, managed to emerge from it.

Of course, even when the collection agent is pounding at your door and you can't pay the mortgage, electricity, cable, and credit card bills all in the same month, bankruptcy should still be your last option.

Before meeting with a lawyer to determine whether you even quality for bankruptcy, Mathew Paulose, a Manhattan-based bankruptcy attorney, suggests exhausting all other options before turning to the court.

Ask your friends and family to loan you money; try to negotiate with your creditors; determine whether a legitimate debt consolidation firm can help; work as many hours as you can, even if that means picking up another job.

If and when all those efforts fail, the bankruptcy court will be your last standing friend.

Non-business bankruptcies are generally filed under either Chapter 7 or Chapter 13.

In a Chapter 7 filing, the individual debtor (or couple) turns over all their assets -- save for a few exemptions like your home, clothing, furniture, and a small amount cash on hand as designated by your state -- to a bankruptcy trustee who then liquidates the assets and distributes the proceeds to your unsecured creditors. Chapter 7 debtors generally get their debt release within 90 days of filing their petition.

In the less commonly used Chapter 13 procedure, a debtor with a steady income agrees to contribute a portion of future earnings to repaying creditors a fraction of the total amount owed over the next three to five years. The debtor maintains control of their assets, but doesn't get discharged of any debt until the repayment plan is completed.

To determine whether you qualify for bankruptcy, your attorney will conduct a detailed evaluation of your total assets, liabilities, income, and expenses. The attorney will file a series of forms known as a "means test" that measure your income and the number of people in your household against the median income for the same size household in your state.

If your income falls below the median, your petition is likely to get accepted and you'll be discharged of your debt, assuming it's great enough to qualify.

However, there are other qualifiers that a trustee will evaluate, too. For instance, if you're filing for a Chapter 13 bankruptcy, you'll only qualify if you have enough excess income to cover a reasonable payment plan.

A trustee will also factor in any prior bankruptcy filings. Chances are you won't be granted a Chapter 7 debt release if you've filed successfully in the past eight years; Chapter 13 can be repeated after just two years.
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