When Your Finances Are Taking Over Your Life

Bankruptcy

Credit counseling should be the first step taken when a person encounters significant financial difficulties. Provisions adopted as a part the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require consumers facing serious financial problems and possible bankruptcy to obtain credit counseling from a credit counseling agency approved by the U.S. Trustee Program within a 180-day period before they apply for bankruptcy.
The law also requires that the individual applying for bankruptcy attend a personal financial instruction course. The course is taken after an individual applies for bankruptcy and as a condition of receiving a debt discharge.

If financial problems occur, call the mortgage lender or servicer. Lenders want to keep owners in their homes and in many cases will help them set up payment plans. Filing for bankruptcy should be done only if no other options are available. Bankruptcy, however, cannot necessarily stop a lender from foreclosing on a home if payments aren't made.

How Bankruptcy Works

The two types of bankruptcy have legal names:
Chapter 13 Bankruptcy and Chapter 7 Bankruptcy. In each, the bankruptcy court trustee takes the pay and whatever a person has that can be sold and decides how to best use those assets to pay the creditors. The person fills out a form showing items owned, what is owed and what has been given away in recent months or years.

In Chapter 13 bankruptcy, creditors are asked to allow debts to be repaid over three to five years. To file, it is necessary to show there is income to repay debts and current bills. Those who have home mortgages and car loans more than $750,000 or credit card debt higher than $250,000 may not be allowed to file this type of bankruptcy.

In Chapter 7 bankruptcy, most debts are canceled, but the court sells all assets to pay as much of the debt as possible. State law determines whether the home would have to be sold to pay debts in a bankruptcy. Some debts cannot be canceled in bankruptcy: taxes owed, child support, credit-card fraud and alimony. Bankruptcy stays on credit reports for at least 10 years.
Two years after making bankruptcy payments and three years after a foreclosure or a deed in lieu of foreclosure, it may be possible to get a home loan guaranteed by the Federal Housing Administration (FHA), http://www.fha.gov .

One way to get credit going after a bankruptcy is to open a secured credit-card account at a bank, use no more than one-third of the credit and pay the bill early every month. A secured account requires a set amount, say $250, to be deposited into a bank account, and the bank issues a credit card with a limit equal to the deposit. Setting up a few secured accounts will start rebuilding credit even during bankruptcy. It is important to use the cards carefully to charge only small items and pay the bill early.