How to File for Bankruptcy

Under what circumstances should a consumer consider filing for bankruptcy? Let's consider few scenarios. Let's say that you owe several hundred thousand dollars in consumer debt, mortgage payments, and other promissory notes, and you've just recently been laid-off from your job. Collection agency notices are piling up, and your bank may be initiating the first stages of foreclosure.

Filing bankruptcy at this stage may be a wise move in that, given the right set of circumstances and state laws in your favor, you may be able to salvage your house or at the very least protect some of the equity you've earned. Of course, there are other ways to improve your situation, such as taking out a home equity loan and using some of the proceeds to eat into both the principle and the interest on your consumer debts. Consider both an extreme financing scenario and a bankruptcy scenario and weigh the pros and cons of each before initiating a filing.

Alternatively, let's say that you run a small but profitable business that's recently come under the “legal gun.” With creditors threatening to seize the assets of your business and thus eliminating your primary income stream, you want to salvage your company -- especially since you have a high mortgage to pay and other financial obligations. In this case, you may file for Chapter 11 bankruptcy to sell off the shares of your business to creditors but otherwise keep your business running to generate more revenue.

Options for strategic bankruptcy may also present themselves, and it's imperative to work with your attorney to suss out any tax shelters or asset havens. Moreover, you need to know whether your corporate mistakes may lead to personal liability. Do you carry errors and omissions insurance? Is the legal action being directed against your company severe enough to warrant proactive protection of your personal finances?

Finally, lets take a look at a scenario in which your income stream is strong and steady but your debts have cropped up to alarming levels. You can choose to file Chapter 7 bankruptcy or even Chapter 13 bankruptcy to deal with pesky creditors and align your debts in a more manageable way. There are more rules and restrictions for Chapter 13 bankruptcies (filings which allow you to maintain most if not all of your assets). And in case you have a viable source of income and even some disposable cash left over, you may choose a debt consolidation plan over bankruptcy to save yourself long-term woes with respect to your credit report.