Bankruptcy continues to hit more Americans

Bankruptcies are on the rise and, due to the current state of the real estate market, the trend will most likely continue. With new bankruptcy laws in force, filing is more difficult and expensive.

Not everyone is eligible to file bankruptcy. Filing depends on income-to-debt ratio. For example, if someone owes 25 percent of their gross annual income in credit card debt, this is considered solvable and, with a practical plan, is debt that can be paid off with hard work. However, if someone owes 60 percent or more of their gross annual income in credit card debt and medical bills, this changes their circumstances dramatically.

"The three major causes for bankruptcy are credit card debt, medical expenses and rising interest rates," says Vernon L. Ellicott, a Westlake Village lawyer. "One of the best ways to avoid bankruptcy is to practice fiscal responsibility. In other words- if you cannot afford to pay cash for an item or pay off your credit card in 30 days, don't buy it."

Ellicott also advises against interest rates that are too good to be true. This is a tactic used by some lenders. They offer teaser rates to customers who might not otherwise be able to afford to buy a home. Unfortunately, when the interest rates become fully indexed, most homeowners cannot make the payments.

Filing options

For individuals there are two bankruptcy options- Chapter 7 and Chapter 13. Recently, bankruptcy laws were changed and, as a result, filing Chapter 7 has become increasingly difficult, forcing most individuals to file Chapter 13, a longer process.

Under Chapter 7, all unsecured debt is discharged. Debtors are usually allowed to keep certain property, such as a home or car. However, they are required to continue payments on the secured loans. Filing Chapter 7 is less expensive and, typically, in less than six months any unsecured debt is discharged.

Under Chapter 13, debtors are allowed to keep all of their property and required to repay unsecured creditors a portion of what they are owed over a fiveyear period. A payment plan is created, and payments vary from $100 per month or more, depending on income and expenses. With Chapter 13, more court appearances are mandatory.

Bankruptcy rulings

Bankruptcy filings are reviewed by a bankruptcy trustee. A judge then grants or denies the bankruptcy based on the trustee's findings.

Because bankruptcy laws are constantly changing, the process can be complicated. Hiring an attorney is recommended.

Bankruptcies typically stay on credit reports from seven to 10 years. Most people will have difficulty obtaining credit within one year of the bankruptcy, and big ticket items, such as a car, will have to be purchased at higher interest rates, with at least 20 percent down.

There is life after bankruptcy. And the good news is, it offers individuals a fresh start.