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The Bankruptcy Process Explained

All it takes is one lost job, one serious medical condition or one unforeseen tragedy to plunge someone into the depths of debt.

Figures provided by the United States Census Bureau indicate that over 1.5 million Americans file for bankruptcy each year. Of those who file, over 60 percent of them have found themselves in dire financial straits due to medical bills.

Consumers have a variety of options available to them when they reach a point where their debt is weighing them down.

Debt negotiation, debt consolidation and debt settlement are a few of the solutions consumers may be exposed to if they listen to the many ads on the television and radio for debt solutions. Debt solution companies are a dime a dozen in this country. A simple search of the internet will turn up more choices than a consumer can reasonably sort through.

And not all debt solution companies are created equal. Most for-profit agencies make promises they have no intention of keeping, which ends up costing a consumer even more money than they already owe. There are a few non-profit agencies which are able to help and do not charge consumers for their services. So if you are one of the 69 percent of Americans who are swimming in debt, a non-profit credit counseling agency would be a good place to start.

For some consumers, their amassed debt may be so great that they need to resort to what should always be the final solution for ridding oneself of debt - bankruptcy.

There are two classifications of bankruptcy in the United States: Chapter 13 and Chapter 7.

Chapter 13 bankruptcy, also known as "reorganization bankruptcy," allows a consumer to pay creditors either all of their debts, or a portion of what they owe. Consumers usually have a three to five year window by which to complete the repayment process. In Chapter 13 bankruptcy, the debtor gets to keep their assets because they have agreed to work out a repayment schedule for creditors.

In order to qualify for Chapter 13 bankruptcy, an individual must be able to prove that they earn enough money to be able to repay their creditors during the length of the repayment process. Those who cannot prove they have enough income to do so will not be permitted to file for Chapter 13 bankruptcy.

The other kind of bankruptcy is known as Chapter 7, which involves full liquidation of a consumer's assets in order to repay their debts. All or some of a person's property may be sold in order to settle their debts. Some property, such as clothing, vehicles and furniture, is considered exempt and cannot be liquidated during Chapter 7 bankruptcy.

Prior to being able to file for either Chapter 13 or Chapter 7 bankruptcy, consumers must first complete credit counseling through a legitimate consumer credit counseling agency. Credit counseling agencies may be able to assist the consumer in repaying their debt without actually filing for bankruptcy. Only if the credit counselor determines that all other options have been exhausted will bankruptcy proceedings be permitted. As part of the counseling process, consumers will learn how to better manage their finances so they are not repeat filers for bankruptcy.

It is also important to note that those who successfully file for bankruptcy can expect it to have a negative effect on their credit report for seven to 10 years. It will lower your credit score, making it harder to secure new lines of credit. Debt consolidation and debt settlement are two options which consumers should consider before declaring bankruptcy. Finding a quality debt relief service that can tailor a financial plan to a customer's needs should be pursued first.

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