Do you know an armchair financial advisor or an armchair lawyer? I run into them fairly often. And I can’t tell you how many times someone has asked me a question, and before I can answer, the non-professional next to me pops up with an opinion that very often has very little basis in fact. My guess is that it probably happens to every professional and tradesperson, but I am bit more alarmed when it happens around credit and bankruptcy issues.

Not long ago, I overheard, in a public place, “I don’t know why they are going through bankruptcy? I referred them to a great short-sale real estate agent.” And I thought, “What if they have a lot of credit card debt?” and then, “How can you possibly express an opinion without knowing all the facts?” I understand that that the person who spoke up just did not know better. Still, these challenging times require that we all better understand subjects like “foreclosure” and “bankruptcies”. That's why I want to share with you information that will facilitate the educational process; and ideally can be passed along to friends who are in need -- before they run into an armchair "expert." This ezine will feature:

• Bankruptcy – What is it really? What's the difference between Chapter 7 and 13? Who are the best candidates?

To begin with a definition, bankruptcy is the legal equivalent of raising your hands and saying “Uncle” to your creditors. It allows the court to facilitate the elimination of debt, or order a restructuring of debt based on bankruptcy laws. The bankruptcy will appear on your credit report for seven to ten years. While you may enter bankruptcy more than once in your life, you are required to wait a minimum length of time before you file for bankruptcy again.

For most people, there are two forms of bankruptcy:
• Chapter 7 –
o This is commonly known as "liquidation bankruptcy." meaning assets not exempt will be liquidated to pay the creditors. Most Chapter 7 bankruptcies are "no asset" cases in which the debtor gives up nothing in exchange for discharge of his or her debts. Typically, these are people with insufficient income to repay debt, or their debt is non-consumer debt, tax debt. An exception may be a very high income earner who has more than 51% of his debt related to business debts.
• Chapter 13 –
o This is not an elimination of debt, but the establishment of a repayment plan where the debtor can repay his or her debt over a three to five year period. The amount repaid is determined by the greater of the non-exempt assets, or "disposable income." This is a good option for debtors who have fallen behind on their mortgage or car payments as the arrearages can be made up over the course of the repayment period.

There are certain conditions to a Chapter 13 bankruptcy:

o It requires a consistent source of income.

o Some home equity lines are “stripped”, which means the debt will not need to be repaid, if the home is facing foreclosure and the amount owed on the first mortgage is more than the current market value.

Once you have taken action to eliminate, consolidate or pay down your credit using one of the forms of bankruptcy you will probably need to take further action to improve your credit rating. I will talk about more about credit repair in upcoming issues.

While a bankruptcy may remove the pressure by allowing you to “de-leverage” your assets, you will definitely need to learn new strategies and techniques to move forward financially. These skills may include learning to better monitor, track and manage your spending. That’s where a Certified Financial Planner can help. I have a great deal of experience working with people before, during and after bankruptcy, and I know there is a way to move forward to a brighter, more secure tomorrow. If you or a friend would like more information on your options when facing a financial dead-end, I offer a complimentary 30-45 minute meeting where we can discuss the specific situation in depth. Please call me to set up an appointment as soon as possible. With these kind of issues, the sooner you take action the better!

Special thanks to Jeena Cho at www.jclawgroup.com for her contributions to this ezine.

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