With the economy dimming, many Americans are finding that their incomes no longer cover the debts they took on when things looked brighter. Those who find a serious imbalance are increasingly turning to a last resort: personal bankruptcy.

The pace of consumer filings is staggering. Nonbusiness bankruptcies are up over 130% since mid-1985. In 1990, filings hit 720,000, according to U. S. court estimates.

BLACK MARK. Personal bankruptcy can be a lifeline to consumers drowning in debt. The federal Bankruptcy Code gives most individuals a choice between liquidating assets in Chapter 7 or rescheduling debts in Chapter 13. Both chapters will immediately stop most creditors from pursuing collection suits or pestering debtors for money.

But declaring bankruptcy isn't a panacea. It won't wipe out all debts, and it tarnishes credit records for a decade (table). This black spot is "the big consideration for any kind of personal bankruptcy," says Houston lawyer Lawrence Young. "You go to buy a house, it turns up. You go to borrow money, it turns up."

Before rushing into court, consumers should consider credit counseling. The nonprofit National Foundation for Consumer Credit (800 388-2227) has 550 locations nationwide that will assess your situation and help devise a repayment plan for an average fee of $9. Counselors will also go to creditors on your behalf and sell the plan. But to work, all creditors must sign on, and the consumer must agree to stop using credit, says Vice-President Jay Muzychenko. About half of those who initiate voluntary plans complete them.

For those who choose bankruptcy anyway, a key issue is whether to hire a lawyer or handle the paperwork on their own. Filers must pay a $120 court fee, but there's no legal requirement to have an attorney. Rather, do-it-yourselfers can turn to books, such as a $19.95 paperback, How to File Your Own Bankruptcy (or How to Avoid It) from Sphinx Publishing in Clearwater, Fla. (800 226-5291).

Bankruptcy lawyers typically charge a flat fee of $500 to $1,500, depending on the area and the complexity of the case. The cost makes sense if the lawyer helps you emerge from bankruptcy with more property or fewer debts. An attorney can also advise you on whether to file at all or on what chapter to pick.

Chapter 7, which accounts for 70% of all individual and commercial bankruptcy filings, is for those who seek a fresh start but lack sufficient income to pay debts. Filers needn't be insolvent or meet fixed debt limits.

HOME FREE? Under Chapter 7, a court-appointed trustee sells off the debtor's property and distributes any proceeds to creditors. Nevertheless, debtors get to keep certain exempt property, set by state law. In generous states such as Florida and Texas, debtors can hold on to their houses, no matter what their value, so long as they meet certain acreage limits. But in New York, they can keep only $10,000 worth of real estate or certain other property.

About six months after the liquidation, the debtor gets a "discharge." This cancels many--but not all--of the remaining debts. Those surviving can include certain taxes, alimony and child support, penalties for drunk driving, and some student loans.

A discharge isn't automatic. The court can deny or revoke it if the debtor has received a prior Chapter 7 discharge within the past six years or committed a crime, such as hiding assets or disobeying the court. Bankruptcy fraud is a felony.

Moreover, a court may throw out a Chapter 7 case if it finds the debtor is substantially abusing the provisions of the law. While the legal definition is murky, substantial abuse may occur if a consumer who can afford some repayment instead seeks to walk away from creditors.

Chapter 13 is intended for individuals who have regular incomes but who can't pay debts as they come due. It gives them up to three years to repay, in full or in part, while barring creditors from taking any action. The court may extend the plan for up to five years.

But Chapter 13 is available only to individuals with no more than $100,000 in unsecured debts and $350,000 in secured debts. And, like Chapter 7, the discharge isn't guaranteed. Nor does it cover all debts. Those that remain include secured obligations, such as home mortgages, and certain taxes, student loans, alimony, and child support.

Regardless of the method, a bankruptcy filing can disrupt everyday life. Often, buying a car or house is difficult. And it may be tough to relocate. Former bankrupts "have one heck of a time renting an apartment," says Robert Johnson, senior research associate at Purdue University's Credit Research Center.

Bankruptcy also can crimp job prospects. Now, all sorts of employers check credit records as a way to prescreen applicants. Thus, a risk exists that the boss will equate bankruptcy with a character deficiency or incompetency.

One just has to live with all this if bankruptcy is truly the only way out of a dire situation. But whatever the method you use, taking care of weakened finances now may make the next new year brighter.


-- Creditors can't dun or sue for payment

-- Some debts get wiped out, reduced, or extended

-- Debtor may keep home or certain other property


-- Debtor often must still pay student loans, taxes, child support, alimony, and drunk-driving penalties

-- Filing blackens credit records for 10 years

-- Lenders, landlords, and employers look with disfavor on bankruptcy


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