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Unbiased Financial Information Provided by Financial Finesse

Let's face it; all of us are susceptible to serious financial pitfalls. Things like unexpected illnesses, periods of unemployment, or severe damage to your home can cause you to lose income or take on added expenses. One thing leads to another. You fall behind on a few monthly payments. Your creditors start calling you, and pretty soon it feels like you've fallen into a deep hole and can't get out. You do the best you can until you finally sit down and ask yourself, "Should I file bankruptcy?"

If you do find yourself going through a major financial "speed-bump" you're going to want to research the facts before you make a decision.

New Bankruptcy Laws Take Effect

Before 2005, you had a choice between credit counseling and bankruptcy; not any more. Today anyone who applies for bankruptcy protection must first use an approved credit counseling service. To see which agencies have been approved in your area, consult this US Department of Justice list. You must meet with a credit counselor in the six months prior to applying for bankruptcy and attend money management classes at your expense.

Credit Counseling: What to Expect

When you work with a credit counselor you enter into an agreement to let the counseling agency work on your behalf to create a Debt Management Plan (DMP).

Under a typical Debt Management Plan, the counseling agency contacts your creditors and makes new payment arrangements with them. You pay the counseling agency a single monthly payment which is then paid out to your creditors. This arrangement continues for 2 to 5 years and the light at the end of the tunnel is that your debts will all be paid!

Avoid services that are for-profit businesses and instead look for services that are non-profit. The National Foundation for Credit Counseling can help you find a credit counseling agency in your area.

The Bankruptcy Option:

Bankruptcy is an absolute "last resort" if you simply can't get out of debt any other way. Bankruptcy damages your credit as well as your reputation. But if your debt is so unmanageable that you can't make the interest payments no matter how hard you try, then it might be time to consider bankruptcy.

There are two types of bankruptcies: Chapter 7 and Chapter 13.


  • To qualify for Chapter 7 bankruptcy, your income level needs to be below your state's median. To find out your state's median income you can go to the website of the U.S. Census Bureau. For more information on means testing go to this section on the Department of Justice website.
  • To qualify for Chapter 13 bankruptcy, you must have sufficient disposable income, your secured debt may not exceed a predetermined limit, and you must be current on your income tax filings. Click here to find out more and see if you are eligible.
  • If you don't qualify for either type, then you are prohibited from filing for bankruptcy and will have to find other ways to pay off your debts.


Credit counseling or bankruptcy?

Review the key differences between credit counseling and bankruptcy in the table below:


 Credit CounselingChapter 7 BankruptcyChapter 13 Bankruptcy
What happens to your debt?You repay 100% of your debt.Many (but not all) of your debts are forgiven.You ultimately repay a portion of your debt.
What happens to your assets?You keep your assets.You may lose some assets.You keep your assets.
How is your credit report affected?May or may not be reported on your credit report. (Ask the agency you are considering using.)Information regarding bankruptcy remains on your credit report for ten years.Information regarding bankruptcy typically remains on your credit report for seven years after you file for bankruptcy.
What will it cost you?Typically, a non-profit agency will charge a set-up fee (approximately $75) and monthly maintenance fee (approximately $50 per month).Court fee: Each state is different but typically $200-$300. Attorney fees will run $500-$1,000 but may vary depending on location.Court fee: Each state is different but typically $200-$300. Attorney fees will run $1,500-$2,000 but may vary depending on location.
What is the timeframe?Average payment plans last for a minimum of 48 months.Debts are discharged 60 to 75 days after the first meeting of creditors.Payments last for 36 to 60 months.


The bottom line is that bankruptcy is the final step if all other avenues of debt payment arrangements have proven unsuccessful. By working with your creditors either on your own or through credit counselors, you may be surprised at the solutions that come about.

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