How to Declare Bankruptcy

When you feel that you're standing at the edge of the financial cliff, bankruptcy can be a good lifeline.
When you feel that you're standing at the edge of the financial cliff, bankruptcy can be a good lifeline.
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America is experiencing a personal debt crisis. Household debt in the United States totaled $11.63 trillion in the second quarter of 2014. The majority of that debt is held in mortgages ($8.09 trillion), but Americans also owe a crippling $669 billion in high-interest credit card debt and $1.12 trillion in student loans [source: New York Fed].

When you get more phone calls from debt collectors than friends and family, and every piece of mail is stamped with the words "Third and Final Notice," it might be time to consider declaring bankruptcy.

No one is excited to declare bankruptcy. It's not part of anyone's long-term plan. But, declaring bankruptcy can be the "best worst" option for people in severe financial distress.

To get started on this legal process for settling your debts, you must file paperwork with a United States Bankruptcy Court and meet the court's filing deadlines and other requirements dictated by both federal and state bankruptcy law. There are bankruptcy courts all across the U.S. assigned to 90 different federal districts.

Although bankruptcies are handled by courts, the individual declaring bankruptcy is not "on trial." Being in debt is not a crime. Filing for bankruptcy is more like applying for government assistance. The court's job is to determine the best way to settle your debts:

  • If you don't have regular income, the court will liquidate some of your assets to pay back your creditors.
  • If you make a steady paycheck, the court will work with your creditors to establish a three- to five-year payment plan.
  • Any remaining debt that the court determines you cannot pay is discharged, meaning it's erased for good.

Living with runaway debt is incredibly stressful and can inflict a serious emotional and psychological toll on individuals, spouses and families. Declaring bankruptcy offers a way out, but it comes with a cost. Once you have filed for bankruptcy, it will stay on your credit report for seven to 10 years, seriously impairing your ability to qualify for new loans to buy a home, a car or start a business.

The first step to declaring bankruptcy is to make sure that bankruptcy is the right solution for your financial situation. On the next page, we'll go over your options.