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Personal bankruptcy: Not a death sentence, but still worth an education

personal bankruptcy should still be considered a desperate option, if not your absolute last resort.

While there are still long-term repercussions that need to be weighed, filing for personal bankruptcy no longer carries the social stigma or the unflinching consequences that it once did. In short, it's a more financially feasible strategy than it used to be, and one that many Americans have opted for over the past five years as a method of climbing out of a trench of debt.

Of course, personal bankruptcy should still be considered a desperate option, if not the absolute last resort. Just because it's more common doesn't mean it's any less risky, or any less an indication of personal hardship. In 2011, more than 1.4 million Americans filed for personal bankruptcy, a figure nearly four times what it was 30 years prior, and one that displays both the extent of financial struggles seen throughout a country still recovering from a recession and the evolution of laws that allow for more flexibility in filing. 

The goal is a clean slate 
The overriding motivation for filing is to eliminate personal debts. But there are important distinctions those who are considering bankruptcy must be aware of. Specifically, Chapter 7 bankruptcy means a debtor agrees to relinquish most - if not all - personal property for collection and sale. The funds from that sale are typically distributed among creditors to whom the debts are owed. A court-appointed trustee will then discharge any remaining balances, allowing the debtor to essentially begin anew.

Non-Chapter 7 processes typically involve payment plans based on a list and breakdown of everything outstanding. The trustee will devise and oversee the plan and, provided it is completed to a satisfactory degree, usually allow the debtor to retain some of their property, such as their home.

All manners of personal bankruptcy filing entail some form of credit score damage. But depending on the depths of personal debt, that may be something of a moot point. If a consistent pattern and commitment to on-time payments is exhibited following the filing, many can rebound from bankruptcy and actually improve upon their scores. But the filing itself will stay on your record for 7 to 10 years, something that serves as a constant impediment since it's viewed as a red flag by many future lenders.

Given the state of the American economy during the past five years - and more specifically the tenuous nature of the housing market - bankruptcy became a preferable option for many homeowners otherwise staring foreclosure in the face. The expanded array of options has allowed many to escape an otherwise unforgiving fate, even if it came at the expense of their credit. Staying in their homes by virtue of an adjusted mortgage has been worth the sacrifice of other property for many. And in a number of cases, payment plans have offered increased wiggle room, especially given the number of financial hardship instances the country has witnessed during its economic downturn.

Exclusions and exemptions
There do, however, remain some exemptions to the type of debt bankruptcy filings can cover. You won't, for example, be exempt from paying alimony or child support. Debts assumed post-filing or any loans that were obtained fraudulently are also usually not part of any repayment or waiver plan. And depending on the chapter and state in which the claim is filed, certain student loans, taxes and debts that piled up within the six months before bankruptcy may also be deemed ineligible. That's why it's imperative to consult a lawyer if possible before committing to and proceeding with a filing.

In most states, debtors are also required to undergo some form of credit counseling. This counseling must be obtained from one of a select few approved providers within the United States court system. There's also a chance, albeit an unlikely one, that the provider will require travel for the counseling sessions. In most cases, though, approval can be gained by completing the sessions remotely, either over the phone or online.

If you're filing for bankruptcy, it's safe to assume funds are rather tight, but those that can afford to hire their own lawyer to help navigate the proceedings tend to fare better. Free legal service options do exist - and can be explored via the American Bar Association - but those who choose their own attorney are more often granted automatic stay protection and cessation from creditor collections. In other words, if you can devise a plan through which you can somehow afford an attorney - be it upfront, via a retainer or as part of the repayment plan - your recovery process will receive a quicker, more forceful kickstart.

Filing, no matter what the chapter, is not an option that suits everyone. But as personal hardship claims have become more common and more complex, a greater understanding and a wider range of routes for repair have emerged at the public's disposal. What's most important is that people receive sound, trusted advice before entering into any process as residual as bankruptcy.