Filing personal bankruptcy is an important decision that requires careful thought. People often believe that entering into bankruptcy will provide much needed debt relief, but this is rarely the case.

New bankruptcy laws have made filing personal bankruptcy expensive and difficult. Known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, these laws require the majority of petitioners to reorganize debts through the establishment of Chapter 13 payments.

Filing bankruptcy is not cheap. BAPCPA requires attorneys to provide the court with a certified letter stating everything presented in the petition is accurate and factual. Due to the certification process, attorneys must verify reported information which requires additional time and results in higher legal fees.

Prior to BAPCPA, petitioners often filed for Chapter 7. This chapter is commonly referred to as \”liquidation bankruptcy\” because petitioners must relinquish non-exempt assets to repay a portion of outstanding debts. Although petitioners must give up property they can obtain a clean slate and start fresh without debt hanging overhead.

Today, petitioners must undergo the \’means\’ test to determine which chapter they qualify for. Essentially, the means test compares debtors\’ income to medium income within their state of residence. Only those who earn less than medium levels qualify for Chapter 7. Everyone else must enter into Chapter 13.

Chapter 13 payment plans can extend up to 5 years. During this time, debtors must remit payments to the Trustee. Bankruptcy payments are in addition to normal living expenses and often cause debtors to experience additional financial hardship. If debtors do not comply with payment plans, the Trustee can request the petition to be dismissed.

When debtors fail out of bankruptcy, not only do they lose court protection they receive a double-whammy against credit scores. Bankruptcy failure can impact housing and employment opportunities and the ability to obtain any type of credit for years to come.

Debtors facing foreclosure often turn to bankruptcy as a way to stop the process. Careful consideration should be given to this strategy because it often backfires. Once a petition is submitted an automatic stay goes into effect that stops creditors from commencing with collection action, including foreclosure.

Banks can file motion to stop the automatic stay against home loans. If this occurs, debtors no longer have protection from the court. Additionally, if banks allow the automatic stay and debtors\’ later fail out of bankruptcy, lenders can commence with foreclosure at the point it stopped prior to the stay.

Another consideration of personal bankruptcy is BAPCPA requires petitioners to obtain credit counseling. Debtors are responsible for the cost of counseling and must present a certificate of completion before approval can occur.

A final consideration is the affect on credit. Bankruptcy remains on credit reports for up to 10 years. Upon filing petition, debtors often witness a decline in FICO scores of 100 points or more. Most petitioners already have low credit scores, so further reduction can be extremely difficult to fix.

It can be advantageous to consult with a lawyer or financial planner to determine if personal bankruptcy is the best option. Those who choose this route should be highly proactive in complying with payment plans and engage in credit repair strategies to boost FICO scores.

Author Bio: Deciding to file personal bankruptcy can be a difficult decision. Author and investor, Simon Volkov provides an extensive personal finance article library offering information about personal and business bankruptcy, and bankruptcy alternatives at www.SimonVolkov.com.

Category: Finances
Keywords: personal bankruptcy, filing bankruptcy, fail out of bankruptcy, chapter 13 payments, chapter 7