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Facing the possibility of bankruptcy can be hard on anyone.  Realizing that your debts are mounting and finding no viable way to pay them can push most people over the edge.  Trying to figure out what your next move should be often falls into the realm of filing for bankruptcy.  If you decide to file for bankruptcy which type should it be?  The answer to that depends on if you feel that this is your last resort.  But before you make a decision to file; there may be other possible solutions you need to look at first. 


If you have 25K or less in debt you may want to try to offer settlements to your creditors.  This can be done as you are able to afford it.  You can sit down with your credit reports and look at each debt.  Plan on offering the debt collection agency at least 50 percent, especially if you want the information erased from your credit.  You can do this on a month to month basis by choosing one or two debts per month until they have all been resolved.  This will satisfy your debts and also save you money.  The 25K owed can be reduced down to 12K or less.  One final note on collections. Once your debt has been sold to a collection agency the damage is already done.   By filing for bankruptcy to pay off or liquidate the same debts is adding insult to injury.


It is possible that your debts could quickly reach the statute of limitations.  Each state has a different statute on how long debts can be viable.  You could just wait until your debts reach the statute of limitations and allow them to just fall away.  Now, many will think this is an irresponsible way to handle your obligations, but if there is no other outlet this may work for you.


Contacting your creditors and making payment arrangements can help you to avoid bankruptcy.  If you believe your financial situation will be temporary then this may be an option for you.  You can ask for a deferment, pay the interest and have payments added on at the end of the loan, or make a reduced payment until your financial situation turns around.  This can help preserve your credit and take away some of the stress.


If all of the above options fail and you must file for bankruptcy; how do you decide which chapter to file?  This will depend on your overall financial picture.   You must have credit counseling completed prior to filing for the bankruptcy.  This counseling may help you to determine another way to handle your debt without bankruptcy.  If not,  you can either file for a Chapter 7 or a Chapter 13 Bankruptcy.

1.       Chapter 7-This bankruptcy is considered liquidation.  This is where the trustee will sell your non-exempt assets to pay towards the creditors that make a claim against you for repayment of debts. This will normally result in a loss of property.  You should think long and hard if you choose this chapter.  Depending on how bad your financial situation is, this may be your only alternative.  This will affect your credit for the next 10 years, but it will also provide you with a “fresh start.”

2.       Chapter 13-This is considered the wage earners plan.  This will allow you to pay off your debts under a structured repayment plan in installments for 3 to 5 years.  After that time the debt is said to be resolved and you are then released from the bankruptcy.  If you have regular income coming in then this would be the plan for you.  A Chapter 13 will reflect on your credit for 7 years which is less than the 10 years under Chapter 7.  There are a couple of advantages to the Chapter 13.   The proceedings may stop the foreclosure process and allow you time to catch up on your payments and save your home.  You can also reaffirm debts you would like to keep outside of the bankruptcy, for example,  your vehicle payments so that all of your credit is not ruined.

Look at all of the alternatives before making the decision to file for bankruptcy.  Your situation may not be as dire as you think.  Have a consumer credit counselor take a look at your debts and see if another option may work.  If you have to file for bankruptcy, try to make the best of this life lesson.  When the bankruptcy is complete; start saving money in an Emergency Fund and live within your means.  This will protect you from repeating the same mistakes again.