Bankruptcy: What You Need to Know

Debt Management - Bankruptcy: What You Need to Know

As much as we'd rather not see anyone declare bankruptcy, there are times when it is the best option. We know it won't be easy, so if you or someone you know is considering bankruptcy, we hope the information we pass here will help you.

Being in the position of considering any kind of bankruptcy is terrible. Yet being stuck with a lifetime's worth of bills is no way to live, and that is why we have laws that allow people to make a fresh start.

When you need a pick me up, consider the "harder they fall the higher they bounce" school of failure and success. Many famous people have declared personal or business bankruptcy and emerged successful again. Here are some you'll recognize:

* Mark Twain * P. T. Barnum * former Texas Governor John Connally * Francis Ford Coppola * Walt Disney * Golfing great Jack Nicklaus was on the verge of bankruptcy in the mid-1980s after investors pulled out of two golf course developments his company started. * Willie Nelson considered filing for bankruptcy after the IRS raided his Texas homestead on tax-evasion charges and confiscated everything in 1990. Only through the help of family and friends was he able to pull himself up.

Making the Decision

The first question is: "When should you file for bankruptcy?"

This is an important decision, so don't rush into it. Here's what we like to tell people as a guide: If you owe anywhere near a year's worth of take-home pay, you're in bad shape and bankruptcy might be your best option.

Notice we said "might." Make sure you talk with a credit counselor first and see if you can work something out short of bankruptcy. If not, a counselor will also be able to refer you to a bankruptcy lawyer, who will show you the ropes and represent you in court.

There are two types of bankruptcies available to us consumers: Chapter 7 and Chapter 13, both named for the bankruptcy code numbers that identify them.

Chapter 7 is a straight bankruptcy. You dissolve your debts, but you also have to sell off most of your assets and any monies realized are distributed among your creditors.

You are still liable for:

* credit card charges made within 20 days of filing * personal loans and installment loans made within 40 days of filing * alimony and child support * certain back taxes * money owed as reparation for intentional harm you caused someone * debts resulting from fraud

If you have regular employment, you will most likely have to file for a Chapter 13 bankruptcy. This type is somewhat less of a stigma on your credit report, because you do repay your debts through a court-ordered repayment plan that usually stretches over a three-year period. It also allows you to hang on to your assets.

You will still be liable for:

* alimony and child support * long-term debts that were not fully repaid during the repayment period

Although the bankruptcy will be removed from your credit record after 10 years (seven if it's a Chapter 13), proof of it will remain on file for 25 years in a regional bankruptcy warehouse. For the rest of your life you will have to answer "Yes" to the question, "Have you ever filed for bankruptcy?" or risk serious penalties.

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About the Author

Ken Dolan and Daria Dolan were anchors for Dolans Unscripted on CNN. They have also written six books on personal finance and hosted several money seminars. Prior to joining CNN, the Dolans were contributors to CBS This Morning and CBS News Saturday Morning and hosted their own show on the now-defunct CNNfn.