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You Can Recover From Bankruptcy

We are talking about the “B” word today—bankruptcy.

The two main types of personal bankruptcy are Chapter 7 and Chapter 13.

Chapter 7 discharges most of your debts — with the exception of spousal maintenance, child support, most student loans, fraudulent debts and IRS debt.

This type of bankruptcy is typically pursued by people in dire financial straits. They can’t pay their bills and the creditors are starting to sue. If you file Chapter 7, you will have to prove your hardship.

On the upside, you will be able to keep certain investments, such as retirement plans and some equity in your home.

When all fails and you don’t qualify for Chapter 7, then Chapter 13 may be an option for you. It allows you to restructure your debts at better terms (i.e. alleviates interest rates), but unlike Chapter 7, it will not delete your debts. This may be a suitable option for a wage-earner who saw a drop in income and can no longer make regular payments to his creditors. He will have up to five years to repay his debts.

A fresh start is what most of my clients are trying to achieve; however, at times a Chapter 13 wage earners payment plan serves its purpose in narrow circumstances when some of your debts may not be dischargeable under Chapter 7 or you have received a bankruptcy discharge in the prior eight years, says Colorado Springs bankruptcy attorney Nathan D. McKinney

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“Bankruptcy is, at times, not only an option but possibly the only option for someone who lost their job, suffered a medical emergency, or gone through divorce, etc., and now has a ton of bills and is scared to death,” McKinney aid. ”These people are not immoral, they just need a fresh start and bankruptcy can allow that without losing basic necessities like your home, transportation and retirements.”

Both types of bankruptcies will ding your credit report and will remain on your report for seven to 10 years. During this time, you may qualify for loans but the interest rates will be higher.

Now, let’s talk about recovery.

The most important step is to acknowledge what landed you in bankruptcy. Was it chronic overspending? Did you suddenly lose your job or your home? Did an addiction adversely affect your finances?

Once you are clear about what went wrong, fix it. Establish a budget; build up a cash reserve; get counseling. Do something! The worst thing you can do is repeat previous mistakes.

Here are a few steps to help you rebuild:

1)   Heal your bruised credit score. Get a secured credit card from your bank and use it often on small purchases. Pay off the balances in full each month. Be careful: Creditors will give you a line of credit, but the interest will be high. Don’t charge more than you can pay off each month.

2)   Apply for a small amount of credit in a furniture or appliance store, and then pay the loan off as soon as possible.

3)   Create a budget and stick with it.

4)   Keep an eye on your credit report. You are entitled to one free report per year from all three credit bureaus. I suggest you request one of those reports every four months.

Bankruptcy is only a temporary solution. It will stop the financial bleeding, but you have to take care of the underlying problems. Approach this financial solution with caution and consult a bankruptcy attorney before you dive in.

Denisa Tova MBA, CFP, CFDP(TM), ChFC, CLU provides divorce financial expertise to divorcing individuals. She is a Certified Financial Planner(TM) practitioner and Certified Divorce Financial Analyst. You can find more information about Denisa Tova at: http://www.denisatova.com. Reprinted with permission of The Colorado Springs Gazette

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