When does bankruptcy make sense?

When bankruptcy doesn't make senseGoing through bankruptcy is a serious matter: Legal fees and court costs can reach into the thousands of dollars and bankruptcy remains on your credit reports for up to 10 years. Filing a bankruptcy petition may not make sense if:

1. Your financial stress is caused by short-term job loss or a one-time unexpected expense.

2. Most of your debt is non-dischargeable. Child support, some taxes and court-ordered restitution fall into this category.

3. Your creditors are willing to work with you to set up an affordable payment plan or reduce your interest rate, you might be able to pay off your debt on your own.

When bankruptcy is a good idea Bankruptcy provides debtors with protection against creditors and the discharge of many of their debts. The "automatic stay," for example, prevents creditors from taking collection action against you while the bankruptcy is in process. In Chapter 7 bankruptcy, eligible debts are discharged after the liquidation of your non-exempt assets. Chapter 13 provides a discharge after you complete a three or five-year debt repayment plan. If your financial problems are long-standing and the amount of your debt, along with any interest that is accruing, is more than you can repay within a reasonable amount of time, bankruptcy may be your best option. This is particularly true if your creditors are using aggressive collection tactics, such as garnishing your paychecks or levying your bank accounts. Federal bankruptcy law requires you to go through credit counseling prior to filing. Take advantage of this opportunity to learn about debt management and your options so that you can make the right decision for your situation.