What to Consider Before Filing for Bankruptcy

Bankruptcies--particularly personal bankruptcies--have been growing at an exponential rate during the past several years. And now, with the economy souring and more people out of work, they are sure to climb even higher.

Filing a Chapter 7 “discharge of debts” or a Chapter 13 “bankruptcy payment plan” allows individuals to get out from under what may seem like crushing debt. But attorneys and credit experts maintain that a personal bankruptcy is not always the best answer.

“Things have to be pretty bad before I’d advise someone to file bankruptcy,” said Dean G. Rallis Jr., partner at the Pasadena bankruptcy firm Rallis & Abril. “If you can avoid it, do.”

Although advertisements on late-night television may make bankruptcy look like an attractive way to “get your creditors off your back,” there are serious and long-lasting repercussions to filing bankruptcy.

The financial repercussions include losing a significant number of your assets and losing your credit, which will make it difficult to buy houses, cars and other items, possibly for years to come.

Many people also suffer emotionally. Petitioners and their families often find it troubling that they were incapable of properly handling their financial affairs, attorneys say.

It is also probable that employers will learn of a pending bankruptcy, and that can have a negative effect as well.

Although many employers won’t admit it, a bankruptcy might hinder a worker’s ability to obtain promotions or to be entrusted with certain weighty responsibilities, said attorney Edward A. Haman in his book, “How to File Your Own Bankruptcy.”

Moreover, bankruptcy itself is not cheap. Filing fees alone exceed $100. And attorney’s fees for the simplest bankruptcy run $150 to $300 at “no-frills” firms that promise only to help you with the paper work. Those providing legal advice, attending creditors’ meetings and appearing at court hearings will charge more--often 10 times as much.

Nevertheless, sometimes bankruptcy is the only answer.

If, for example, your house is about to be foreclosed upon and your car repossessed, it might be wise to file a personal bankruptcy. It will, at least temporarily, hold the wolves at bay and help you protect a limited number of your assets.

When you determine that bankruptcy is the best answer, you need to determine whether to file a Chapter 7 or a Chapter 13.

The difference: Chapter 7 essentially discharges your debts in one fell swoop. You file, and a trustee is appointed who might arrange just one meeting of creditors. The trustee sells or distributes all your “non-exempt” assets to creditors. You keep exempt assets--generally, clothing and personal belongings as well as a limited amount of equity in a house or car. At the end of the process, you emerge debt-free.

There are some exceptions. For example, bankruptcy generally will not clear debts owed to the government, such as taxes, alimony or child support payments, certain types of student loans or obligations owed as a result of criminal or fraudulent actions. If you forget to list or notify a creditor about your filing, the bankruptcy does not discharge that debt either.

A Chapter 13 is somewhat more complex. This wage-earners bankruptcy requires you to work out a payment plan by which you pay your creditors all or a portion of the money you owe them over time.

Although a Chapter 13 is a little more difficult for the individual, it often carries less of a financial stigma. Chapter 13 petitioners generally will find it easier to regain their credit after bankruptcy than Chapter 7 petitioners, attorneys maintain.

How do you determine whether to file bankruptcy?

You start by getting organized.

Compile all your bills and make a list of debts and assets. Determine your monthly payment requirements and your income. Obviously, keep an eye out for luxuries that you can do without.

Consider whether you can sell certain assets and pay off your debts without filing bankruptcy. And try talking to your creditors to work out lower monthly payments that you can handle.

If you need help with these steps, you may consult any number of organizations offering free assistance. One of the best is Consumer Credit Counseling Service, a nonprofit organization that helps individuals work out budgets and debt repayment plans.

When debt payments are repressive, they’ll also help negotiate with creditors, who are often more accommodating when CCCS is involved. In Los Angeles, Consumer Credit Counseling can be reached at (213) 386-7601. (The organization has hundreds of offices nationwide.)

Bankruptcy should be a final option, used only when the consumer is likely to lose everything--houses, cars and personal belongings--because of insurmountable debts.