Avoiding debt. Bankruptcy, the last resort Banking Center

As you may know, negative information stays on your credit report for 7 years, except for bankruptcy, which will stay on your report for ten years. While you may be trying to do everything possible to avoid ruining your credit record, there are some instances---such as job loss or illness---that force consumers into seeking protection from creditors. Financial troubles have led millions of Americans to file for bankruptcy, often using the process as an "alternative." How wrong. Filing for bankruptcy is the last resort to your financial woes, not a choice. If you are in debt and need to file, however, there are pitfalls you can avoid. Most often, you don't have to file unless it's necessary---declaring yourself bankrupt is not an alternative, it's a necessary solution. One bankruptcy attorney in Chicago claims that he has yet to see a situation where the filing was not required. If you are having difficulty meeting your rent or mortgage payments, you're completely extended beyond your credit limit, the collection agencies are uncooperative and you need more than a credit counselor, you may need to file for protection. An estimated 1.1 million Americans filed for bankruptcy in 1996, a record number. With that many individuals filing for protection under the bankruptcy laws, much of the stigma has disappeared. But bankruptcy should still be considered as a last resort. Bankruptcy stays on your credit report for ten years, making it difficult to reestablish your credit. However, for those folks who have filed for bankruptcy, a secured credit card may help you rebuild your history. There are two basic ways of filing for personal bankruptcy. "Chapter 7" gets rid of all debts (except some taxes and maybe alimony payments); "Chapter 13" allows you, when in debt and with a steady income, to pay off your bills over a 36-to-60-month period. Tip: Seek the advice of an attorney who will guide you into which bankruptcy proceeding you should file, according to your personal debt situation. When you file either Chapter 7 or Chapter 13, you are issued a restraining order by the court which will protect you from all further proceedings against you until all previous debts are cleared. The restraining order includes protection against wage garnishing, creditor harassment and foreclosures without a court order. How do you know which one is best for your situation? Here's a brief description of both: Chapter 7 is used mainly if you have unsecured debts. For example, if you have furniture or appliances as unpaid collateral, you can return these without paying for them. But if you want to keep these things, you might be allowed a reaffirmation agreement with your creditors. Also, attorneys' fees are set where you can establish an installment plan. Chapter 13, a wage-earner plan, brings immediate relief by letting you pay your bills rather than let them go (unlike Chapter 7). You are eligible for an extension plan that allows you to pay back all your bills within a certain period of time, usually 36 to 60 months. Costs incurred by the attorney are added to the total of your other debts, and paid from your payments to the court trustee. The bright side to filing for bankruptcy is immediate relief. The dark side is a black mark that remains on your credit record to haunt you for 10 years. Thinking about an Auto Loan? Home Equity? Any bank product? We give you unbiased rates for your area at bankrate.com.