Bankruptcy Can Be an Important Tool for Getting Out of Debt

Given the state of the current economy, dealing with seemingly insurmountable amounts of debt is an unfortunate reality for too many Americans. Many people struggling with debt consider bankruptcy as an option.

Bankruptcy, of course, is not a good solution for all people facing financial hardships, but it can be a useful debt relief tool for some. Before filing bankruptcy you should understand the process and be familiar with its results.

Types of bankruptcy

There are two different types of bankruptcy petitions that are generally applicable to individuals facing financial hardships. They are known as a Chapter 7 bankruptcy and a Chapter 13 bankruptcy.

Chapter 7 bankruptcy is commonly referred to as liquidation bankruptcy. Generally, most types of debt are discharged through a Chapter 7 bankruptcy, allowing a person who files to move forward without debt. Unfortunately, not all types of debt can be eliminated through bankruptcy. For example, secured debts (or debts that are secured by a specific piece of property such as a car loan), student loans and tax debts are common types of debt that can't be discharged through bankruptcy.

Chapter 13 bankruptcy is substantially different. In a Chapter 13 bankruptcy, the person filing bankruptcy must make monthly payments for a period of three to five years. The timeframe, as well as the terms of payment, are laid out in a plan decided by the Bankruptcy Court. After the time period is up, most of the person's remaining debts will be discharged. A Chapter 13 bankruptcy can be useful because it can help prevent a mortgage foreclosure.

What to do when bankruptcy is the best option

If you have decided that filing for bankruptcy is the best possible option given your financial situation, there are some important steps that you can take to begin the process.

The first step is to organize and gather all of your financial information. This includes gathering all of your financial statements and creating a list of all income sources, monthly living expenses, assets and debts. It can also be useful to obtain copies of your credit reports to ensure that you have information about all of your debts.

In addition to gathering information about your debts and finances, it is important to create a list of all of your property. It is important to list every item of property including houses and land, motor vehicles, jewelry and even household goods. A bankruptcy attorney will need to list your property on the bankruptcy petition and make sure that it will be protected from collection by the bankruptcy trustee.

Once all of your information has been collected, it is a good idea to have a bankruptcy attorney prepare a bankruptcy petition for you. The forms that must be submitted to the bankruptcy court are complex, and it is important not to make any errors because these could result in your property being taken or debts surviving the bankruptcy.

A knowledgeable bankruptcy attorney can help guide you through the entire bankruptcy process and ensure that after bankruptcy you will have a fresh start financially.