Declaring bankruptcy is a personal decision never to be taken lightly. It is often considered the last resort in debt management because there are serious consequences attached to it. A bankruptcy stays on your credit report for 10 years. This might make it challenging to buy a home or get good interest rates. Nevertheless, it is a legal procedure that gives you a fresh start when you cant pay your debts.



How does it work?





A bankruptcy means you do not have to repay certain debts. Both Chapter 13 and Chapter 7, two different types of bankruptcy, will stop foreclosures and repossessions, utility shut-offs, and debt collection maneuvers. Both types provide exemptions that allow you to keep certain assets. Keep in mind that you are not excused from paying child support, alimony, fines, taxes, and student loans. Bankruptcy will not allow you to keep property if there is an unpaid mortgage or lien on it.



Is it for you?



This is an important decision and an attorney is a good idea before making up your mind. Some things to consider:



Create a budget. You want to find a way to pay bills on your own. Sit down with a calculator and determine how long it will take to become debt-free. Is this an acceptable goal? Will it leave your family anything to live on? Create a budget that pays at least triple the minimum monthly payment if you can so that it doesnt take up to twenty years to pay them off.



Consider credit counseling. A legitimate credit counseling service should sit down with you person, so be sure to pick a local place with which to work. Together, go over your income and expenses, and budgets. Contact all of your creditors and discuss your options for lowering the balances and interest rates. After the negotiations, you will make one monthly payment to the credit counseling service and they will distribute payments to each of the unsecured creditors. This should help you to become debt-free in less than five years.



Try debt settlement. With this option, you might have to use an attorney because its complicated with many different positives and quite a few negatives. Something to consider is your cash flow. If you can come up with cash, perhaps from refinancing, tax refunds, or loan from a family member, then you might be able to settle your unsecured debts for up to 60% of the outstanding balances.



Contact your creditors in writing and offer cash settlement of up to 15% of the balances. Haggle a bit and when negotiations are over, request written confirmation of the dollar amount needed to forgive the rest of the debt. Usually the settlement must be received by a certain date. To be safe, always mail the agreed-upon amount by certified mail with a return receipt requested just in case you have to prove that you sent it on time. Dont ever send cash. The payment needs to be a check so that you can prove it was received.



Seek an attorney or tax experts advice. Its been said before, debt repair and bankruptcy can be complicated. If you negotiate with a collection agency and believe the debt to be settled, what will you do if youre contacted at a later date by another agency collecting on the same debt? You might try to again solve the problem yourself only to be told that the debt was never settled and you are required to pay or suffer further penalties. An experienced attorney can help you settle these debts correctly with fewer problems.



Report all forgiven debt as income. Unless advised otherwise, the IRS considers forgiven debt to be reportable income. For example, if you settle $20,000 of debt for $12,000, then you might owe taxes on the forgiven $8,000. Since creditors dont normally settle debts until they are delinquent, allowing yourself to go into delinquency might cause a host of other problems. Once again, consult a professional for the advice you need to get through this difficult time.



Research the difference between Chapter 7 and Chapter 13. Even if you consult a professional opinion, do the necessary homework to understand what you might be getting yourself into when declaring bankruptcy. Becoming an educated consumer or client will only help you make the best decisions for yourself.



Ask your friends for references when looking for an attorney or CPA and interview them before making a choice. Free or inexpensive consultations, which are confidential, are the best ways to get to know these professionals before hiring one.



Bankruptcy was set up to help people like you who are suffering severe financial hardship. It allows you to get relief. Do not think of it as a failure, but as a fresh start. Bankruptcy isnt a reckless act, but a responsible decision. As a matter of fact, Thomas Jefferson, who is widely considered one of our best U.S. Presidents, filed bankruptcy more than once.



Catherine Durkin Robinson is a contributing writer for BillSavings.com , your information resource and community for money-saving tips and offers so you can shop, compare, and save money on just about everything.