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Bankrupcy filings are occurring at unprecedented rates. With the ever-growing credit crisis and increased unemployment, many Americans are facing challenging financial times. For many people, bankrupcy is the only alternative to save their home from foreclosure.

There are numerous reasons people file bankrupcy. At the top of the list is subprime lending and lack of adequate health insurance. Chronic illness and mounting medical bills can quickly cause a person to go bankrupt. Other causes of bankruptcy include loss of employment, death of a spouse and living outside your means.

In the past, the majority of people sought debt relief through Chapter 7 bankrupcy. Chapter 7 allows debtors to liquidate assets to repay creditors. Any remaining balances owed after liquidation are discharged through the bankrupcy court. The debtor is able to walk away with a clean slate and fresh financial start.

Unfortunately, too many people began using Chapter 7 as a way to rack up a tremendous amount of credit card debt, than file bankruptcy to avoid repayment. To circumvent this abuse, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005.

BAPCPA states, "Americans who have the ability to pay will be required to repay a portion of their debts." In order to determine the payable amount, a financial tool called the 'means' test was developed. The means test uses each individual states median income level as a basis for repayment of debts.

Individuals whose income falls below their states' median level might be allowed to file for Chapter 7. However, the majority of debtors are now required to file Chapter 13 bankruptcy; also known as reorganization.

Chapter 13 requires debtors to develop a repayment plan which must be approved by a bankruptsy judge. Repayment plans typically last between three and five years. Debtors must adhere to strict guidelines and ensure their payments are submitted in full and on time. Otherwise, the debtor could fail out of bankruptcy and lose all protection from the bankruptcy court.

Although there is no law which requires debtors to hire a bankruptcy lawyer, BAPCPA has made it increasingly difficult to file a bankruptcy petition without legal assistance. Experts recommend interviewing three or four bankruptcy attorneys prior to making a final decision.

Additionally, be certain to research bankruptcy alternatives such as debt consolidation, debt settlement, debt management, credit counseling and budgeting. In many instances, bankrupcy can be avoided by taking time to review your finances and negotiating with creditors.

In closing, it is important to note that filing a bankrupcy petition does not guarantee your request will be granted. While every U.S. citizen has the right to seek bankruptcy protection, there is no law which states they must be granted this privilege.

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Published on November 05, 2008 at 04:55 PM

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