Sometimes people end up with more debt than they can handle. Often it is not due to irresponsibility, but to circumstances beyond one’s control. Job loss, unexpected medical expenses and other such situations can cause finances to take a sudden turn for the worse. When such things happen, bankruptcy can ease the financial burden.

Bankruptcy should only be used when all other alternatives have been exhausted. It remains on your credit record for ten years, making it difficult or impossible to obtain loans and other types of credit. But in some cases, it is a debtor’s only hope for relief. If you’re considering bankruptcy, it’s important to know which type is best for your situation.

Chapter 7

Chapter 7 is the most common type of bankruptcy for individuals. It requires the debtor to turn all non-exempt property over to a trustee. The trustee then liquidates the property, distributing the proceeds to creditors to lower the debt. The remainder of the debt is usually discharged, as long as it doesn’t fall into categories that are ineligible for discharge.

Those filing for Chapter 7 bankruptcy must pass a means test to show that they are unable to repay their debts. Generally, they must have a total income below the mean income for their family size in their state. Those who do not qualify for Chapter 7 usually qualify for Chapter 13.

Chapter 11

Most Chapter 11 bankruptcies are filed by businesses, but individuals are also eligible for this type of bankruptcy. This type of bankruptcy is costly and complicated, and is only appropriate for individuals under certain circumstances that involve large amounts of debt and assets.

In Chapter 11 bankruptcy, the business (if applicable) may continue to operate. A repayment plan must be written and approved by creditors and the bankruptcy court. A trustee is not appointed unless there has been some sort of wrongdoing by the filing party.

Chapter 13

Chapter 13 bankruptcy is the second most common type of bankruptcy filed by individuals. In order to qualify, debtors must have an adequate amount of disposable income and their debt must fall below limits set each year.

Instead of turning over assets and having the debt remaining after their liquidation discharged, the debtor proposes a repayment plan in which he will repay creditors over a period of three to five years. Creditors may object to the payment plan, but the bankruptcy court has the final say as to whether it is accepted. The debtor is allowed to keep his property, and he pays creditors a reduced amount.

Bankruptcy is not something to be taken likely, but sometimes it is necessary to help debtors get a fresh start. A bankruptcy attorney can help determine whether you should file, and if so which type of bankruptcy is appropriate for your situation.

Get This Book Today==> The Personal Bankruptcy Toolkit by Daniel Sitarz

Bankruptcy

Have you read the latest news about amusement park operator Six Flags filed for bankruptcy? This is unbelievable. Is it really necessary?

For those who feel that they are in serious financial distress, bankruptcy may have crossed their minds. Bankruptcy is not something to be taken lightly. While your debt may be wiped clean, there are far-reaching consequences for that “new freedom”.

When a person’s debt has risen to a level that they can’t hope to get under control, they may consider filing for bankruptcy. For a consumer there are two bankruptcy choices: Chapter 7 and Chapter 13. Chapter 7 bankruptcies involve wiping out the debts in part or in their entirety and liquidating assets to do it. Chapter 13 bankruptcies are more of a debt restructuring plan that gives you more time and a plan to pay back a portion of the debt that is owed to creditors.

Bankruptcy damages a person’s credit. A bankruptcy judgment stays on credit reports for as long as ten years. During that time, any credit that is applied for will disclose the bankruptcy to the creditor. If filing Chapter 13, you still have to pay back part of your debt and the judgment stays on your credit report for ten years.

In the past, people have taken advantage of the bankruptcy laws. For instance, people have been able to file more than once for Chapter 7 bankruptcy. They have used it as their own personal “debt eliminator”.

Each state decides on what assets they will exempt from being seized during a bankruptcy hearing. Knowing that, some may use available cash to purchase those items (homes, cars, etc.) in an effort to avoid payment and still retain the stuff they purchased. In this instance, creditors receive little or nothing from the bankruptcy settlement.

The new laws concerning bankruptcy have changed this. Whereas courts used to have the leeway of deciding who could file for Chapter 7 bankruptcy, there are now criteria that must be met first. In order to file for Chapter 7 bankruptcy, a person has to have an income that is below the median income for the state where they live. Their income must be put through a calculation that determines if they have enough disposable income to pay twenty-five percent of their outstanding debt.

More people that file bankruptcy will have to file under Chapter 13. The courts decide what a person could pay from the information provided to them. There is an allowance made for rent/mortgage, food, and other pertinent bills. With the new bankruptcy law, standards set by the IRS determine allowable values for each of these bills. A certain amount is exempted, and the payments are determined from the rest.

Because there are more hoops to jump through, bankruptcy lawyers are charging more for their services. The whole process of bankruptcy will cost the filer more than before, which will make them think twice about the process. Credit counseling sessions are also required as a precursor to filing for bankruptcy. A credit counselor may determine that they can help you and thus eliminate the need for bankruptcy proceedings.

Bankruptcy should always be a last resort. While it will give you a clean slate, it comes at a price.

Our credit scores play a big role in determining the results when we apply for a credit card or loan. A good credit score can help us get the credit we need at the best possible rate. A poor credit score could result in a higher interest rate or denial of credit. It is in our best interest to make sure our credit scores are as high as possible.

The credit bureaus keep the exact method for figuring credit scores a mystery. But there are a number of factors that are known to impact our credit scores. Here are five things you can do to improve yours:

1. Keep an eye on the information contained in your credit report. Sometimes the bureaus make mistakes, and identity theft can also wreak havoc on one’s credit report and score. Federal law requires each credit bureau to provide one free report per year to any consumer who requests it online, by phone or in writing, and we are also entitled to a free report if we are denied credit. So check your report regularly, and if you find any inaccuracies, dispute them in writing.

2. Always pay your bills on time. Even if you’ve made payments late in the past, keeping current bills paid on schedule will help raise your credit score. The longer your history of keeping payments current, the more it will improve your credit score.

3. Keep credit card balances low. Just because you have a $10,000 credit limit, that doesn’t mean you should use it all. A good rule of thumb is to keep each credit card balance at or below 25 percent of the limit. Even if you have a perfect payment history, carrying too large of a balance can adversely affect your credit score.

4. Avoid opening too many accounts in a short time frame. This is especially important if you have a short credit history, but it also applies if you have well-established credit. Opening lots of accounts in rapid succession raises concerns that you could get in over your head, hence lowering your credit score.

5. If you pay off an account, keep it open. This will help by lengthening your credit history. It can also reduce your balance to credit limit ratio, unless you transferred the balance to another card.

Improving your credit score is not as difficult as you might think. A few simple adjustments can really make a difference, but it does take some time. If you are planning to apply for credit, start working on your credit score a few months ahead of time. This will increase your chances of getting the loan or credit card, and it could save you lots of money on interest.

Credit repair agencies claim that they can remove bad entries from your credit report. But did you know that you can often have them removed yourself at a much lower cost? There are two methods by which you may be able to get negative entries removed from your report.

Option #1: File a Dispute with the Credit Bureaus

The Fair Credit Reporting Act (FCRA) requires credit bureaus to investigate any item on your credit report that you dispute. If the information is found to be false, inaccurate or unverifiable, it must be corrected or removed from your report. The bureaus have 30 days from the time they receive notice of the dispute to complete their investigation.

If there is any inaccurate information on your credit report, a dispute is certainly in order. But some people have had luck disputing items that were in fact accurate, including judgments, collections accounts and repossessions. If such items are not verified by the creditor (or the court in the case of judgments) within the time limit for investigation, they must be removed.

If you decide to dispute a legitimate entry, simply write a letter to each of the credit bureaus stating that you dispute that entry. No explanation is required. But keep in mind that if the entry is verified, it will remain on your report. And if the creditor verifies the information after the 30-day time limit, the credit bureau may reinstate the entry as long as they notify you at least 5 days before doing so.

Option #2: Negotiate with Creditors

Dealing with creditors can be intimidating, especially if you’re not on good terms with them. But speaking to your creditors directly may help you get negative information removed from your credit report.

If you only have a late payment or two on your account, a creditor might be willing to remove the derogatory information once you’ve resumed a regular payment schedule. If you’ve experienced repossession or had an account turned over to collections, payment in full might persuade them to remove the negative entry. It sounds like a long shot, but you never know until you ask. Requests to remove late payment information may be made after you’ve brought you account current. But if you’re hoping for removal of a repossession or collection action, it’s best to negotiate a deal before you pay anything.

If You Can’t Get the Bad Entries Removed

There is no guarantee that disputing information on your credit report or negotiating with creditors will get negative items removed from your record. If it doesn’t, the best thing you can do is try to build up some positive information on your report.

The first thing you need to do when trying to rebuild good credit is bring past due accounts current. Try to work out a deal with your creditors to accomplish this, or talk to a credit counseling agency. But don’t miss payments on current accounts to put money toward those that are past due. If it comes down to paying one or the other, keep the current account current.

Once you’ve brought all of your accounts current, put a priority on keeping them that way. Making your payments on schedule will raise your credit score, and with the passage of time, the good entries may outweigh the bad.

The financial counselor went over the woman’s credit report, income, and debts.  After a while, she looked at the woman and told her she was in debt for $108,000.  There was instant shock on the woman’s face.  She hadn’t realized that she owed that much money.

The financial counselor asked the woman to call several credit card companies, beginning with the company which had the highest interest rate.  After several calls and definitive tones, the woman was able to lower most of her credit card interest rates. This example is just one of many scenarios that most people are facing during this recession.

Most would suggest she should have known how much money she owed.  While the general consensus would agree, the truth is the woman was fearful of what she might find.  Instead, she paid the minimum balance on her cards and it wasn’t until she found herself in a position where she might lose her home that she finally faced reality.

This story is analogous to someone with a weight problem, for example.  Perhaps the doctor has been telling the patient for years that he needs to lose weight or he will face serious consequences.

The patient listens to what the doctor is saying, but the subconscious mind is not accepting the reality.  Instead, the patient is justifying his actions by giving the doctor excuses.

In both examples, fear is the catalyst that prevents each of these people to face the truth.  Denial also plays a role in their inability to accept the reality that they are on a precipice and, unless and until they change their mindset, they are doomed to repeat the same mistakes over and over.

We all have our own financial realities to face; the question is:  Are we strong enough to meet the challenges and make the changes needed to find the path to financial freedom?

Here is another great strategy from Suze Orman. I found it extremely useful during this period. Please read it.

If you have an unpaid credit card balance and not much saved up in emergency savings I need you to listen up. My advice has changed.

I want you to only pay the minimum due on  your credit card balance and instead make it your top priority to build as much of an  emergency cash fund as you can.

Let me tell you why I am now telling you to do this. With rising unemployment, having a big emergency cash fund is vital, even if it means curtailing your credit card repayment strategy.

The sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been about paying your bills on time. The problem is that most credit card companies are either reducing your credit limits, raising your interest rates and are even paying you to close down your account. Many of you are even finding that when you do  finally pay off your credit card debt that the  issuing credit card company of that card is closing that card down as fast as they can so you cannot ever charge on it again. You did everything right, and yet still you could have your credit limit reduced, which can have a negative impact on your credit score.

So here is the problem. If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down—what are you going to live on if you lose your job? Chances are you may not have any available credit, or too little credit, to use in the event you are laid off. Nor will you be able to get a new card if you are unemployed.

That’s why I am telling you to pay just the minimum required on your card each month and then use every extra penny you have to build up your emergency savings fund. You want to have a fund that can cover your living expenses for up to eight months.

If you revert to paying just the minimum on your credit card there’s a chance it may indeed hurt your credit score. But as I just explained, even if you do pay it down there’s a chance your credit score will be hurt if the credit limit is reduced.

I want to be very clear: I still believe getting out of credit card debt and making sure your FICO score is as high as possible is incredibly important. For those of you with a fully-funded emergency account please make it a priority to pay off any credit card balances as soon as possible. My new advice is solely for those of you who do not have an emergency savings account, or too small of an account. The single most important Action to take in this severe recession is to build savings so you and your family will be able to have money to cover your basic necessities if you lose your job.

As you have heard me say before: Hope for the Best, Prepare for the Worst. And right now we all need to be redoubling our preparation efforts.

Suze Orman's 2009 Action Plan

If you are interested to learn how to survive better in the year 2009, you must get this Suze Orman’s 2009 Action Plan Book.

1.  Debt Consolidation. When you receive a credit card offer in the mail stating that you can pay off other credit cards by applying for the card with a 0% APR – read the fine print.  The 0% APR is applicable for a short time only.  Unless you can pay off the new card within the time frame given, you are just creating additional debt.

2.  One Card Only.  If you have more than one credit card, save one for emergencies only and cut up the rest.  If you cannot afford to buy an item with cash, don’t buy it at all.

3.  Pay Down Debt.  The next few years are going to be difficult during this recession.   Start paying off credit cards using the Snowball Method.  Make a list of the credit cards, with the highest interest rate card at the top of the list.  Instead of paying the minimum for the card on top of the list, add additional money to the payment.  Once the first card is paid off, use this same method with the second, and so on.

===> Free Powerful Debt Reduction Strategies Guide

4.  Credit Card Checks.  Every month you may receive credit card checks, one of which is probably made out to you for the amount of $1000 or more.  The rest of the checks can be used for purchases or transfers.  Rip them up!  It is very tempting to deposit the check and use the rest to make purchases.

5.  Department Store Credit Cards. No doubt you have been asked by the cashier at a department store if you wish to apply for instant credit in order to obtain a discount on your purchases.  Do not apply.  Department store credit cards have the highest interest rate among all credit cards.

We are a nation in debt – over a trillion dollars’ worth.  Since we do not know how long this recession will last nor how it will affect our income and retirement savings, it would be prudent to resist any temptations that may come your way inviting you to spend more than you can afford.

Answer: That’s a tough spot to be in. Let’s look at the scenario that your debts are higher than your income but you’re still able to make the payments. It sounds like this is really worrying you – maybe that you won’t be able to make the payments soon. So, now is a good time to be asking this question. Since you can make the payments, every month, you’re actually in a good position to be able to eliminate the debt over the next couple of years (perhaps sooner). Here’s what to do…

1. From Minimum Payments to Fixed Payments. Convert all your current minimum payments to fixed payments. That means that if you are paying $55.55 this month, you’ll pay that every single month until the debt is paid off – no matter what the minimum payment is on your bill.

2. Stop Using Your Credit Cards. There’s no grace period on cards that have a balance so you start paying interest on new charges immediately.

3. Get Clear on Your Debt. List every one of your debts on a piece of paper (you can get my form here) so you know exactly what you’re dealing with. Sometimes it’s worse than you thought and sometimes not so bad but you won’t be able to really know until you see it all in black and white.

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For example, here is a typical credit card policy: “The APR is 8.99%.  Your APR may be higher.  We will set your initial APR between 8.99% and 24.99% based on creditworthiness.  We reserve the right to change your APR, fees, or other credit terms at our discretion.  Additionally, if you fail to pay any minimum amount payment by its payment due date, we may increase your APR up to a default APR of 27.99%.”

This particular creditor is not unlike others you may have applied for.  It is important when applying for a credit card to ascertain the APR rate, monthly fees, and default percentage that may be incurred if you do make late payments or skip a payment.

Not paying off your bills on time can make an already complicated situation worse, especially if you are living from paycheck to paycheck.  Moreover, not only will you incur the highest APR percentage on that card, but it will also be reflected on your credit report, thus lowering your FICO score.

The key to successfully paying bills when they are due is to establish and stick to a budget.  In this way, you can list all household expenses and debts and pay them accordingly every month.  Most of the time, credit card payments are due between the 15th and the end of the month.  If you are paid on a bi-monthly basis, setting aside money for each bill may be easily achieved.

There is also another alternative that can assist you in paying bills on time.  You can sign up with credit card companies to pay via the internet.  This does not replace receiving the bills through the mail; however, you can access your statement at any time and by receiving emails letting you know payment is due, you are more likely to pay them on the date the email is received.

Moreover, the company provides the due date so that you can decide to either pay it on the day you receive the email, or you can click on the calendar provided and make the payment as close to your payday as possible.

It is a perfectly safe method of paying bills on time.  All you need to do is to provide your checking account information and once payment has been made, it is posted to your account on the same or next day.  In fact, you will receive an email stating the payment has been posted.

Paying off bills on time affects your FICO score in a positive manner and decreases the possibility that additional late fees and increased APR rates will be incurred.  In addition, by using the internet to pay bills it affords you the opportunity to never miss a payment again.

If you are interested to learn more how you can pay off your bills on time, you may be interested to check out this book – the Ulitmate Debt Guide by Scott Stephen.

Myth:  There is only one credit score.
Fact:  There are three credit scores; one from each of the aforementioned agencies.  Read The Main Credit Bureaus

Myth:  Your score will decrease every time you check it.
Fact:  Not true.  You can ascertain what your score is as often as you need to and it will not lower your score at all.

Myth:  The FICO score is determined by income, age, and gender.
Fact:  False.  Your score is determined by many factors, none of which include the above.

Myth:  The more money I have, the higher my score will be.
Fact:  Untrue.  The score is based on payments made on time, and keeping your debt under 75% of the credit available.

Myth:  Credit repair organizations can remove information on your credit report that is unfavorable and thus increase your score.
Fact:  False.  If you find inaccuracies on your credit report, you can easily dispute them by writing to each agency individually.  However, it will not increase your score.

Myth:  The more credit card applications received, the lower the score.
Fact:  Untrue.  While we are flooded with these applications in the mail, if you don’t apply, your score is untouched.  It is only when you do apply, and wind up with many high-balanced credit cards that are in use, that your score may be lowered.

Myth:  Scores will rise if credit card accounts are cancelled.
Fact:  False.  The truth is that it is better to keep a long-existing credit card account even though you may not use it.  It has a history attached to it; the number of years you’ve had it, used it, and maintained steady on-time payments.  This is the card that gave you a high score to begin with.  To cancel out an account would defeat the purpose of maintaining a high credit score.

Myth:  Applying for a new credit card to pay other credit cards raises the score.
Fact:  Absolutely untrue. Keep in mind; if you own $5,000 and you apply for another credit card to pay the $5,000 off, you are still in debt for $5,000.

Myth:  Having no credit cards is a good thing.
Fact:  Wrong.  At some point in your life, you will need to establish a credit card history.  It’s a catch-22 situation.  Without a credit card, you cannot create a credit history, you cannot finance a car, home, or other tangibles you wish to own.  Credit history is essential in obtaining high credit scores.

Owning a credit card and working to obtain a high credit score will serve you well, as long as you do not incur expenses above your means.  Pay on time and/or pay off balances when you can; stay within the 75% of available credit and over time, your credit score will work well for you.