Filing bankruptcy: Is it a good idea?

If you have been contemplating bankruptcy then it means you have not been able to manage your finances like you wanted to. However, declaring bankruptcy is a big step. It reflects on your account for 7 to 10 years and may influence lenders' decision in future when you apply for another loan. It is always a better idea to clear off your debts instead of filing bankruptcy.

Bankruptcy should be the last thing on your mind, when you have exhausted of any other idea to repay your loan amount. Only when you find no other way to get out of your debts, you may file bankruptcy. Until then, you can try to pay off your debts. Filing for bankruptcy makes sense only when:

• You have tried to negotiate with your lender and have failed to get a loan modification. Usually, most creditors offer loan modification rather than losing so much of their money. However, if your creditor has not budged and you have no means to pay him back, then you may file bankruptcy.

• You simply cannot pay back the amount you owe and your monthly income is less than your debt i.e. your liabilities exceed you assets. This is another situation where you can file bankruptcy.

• You want to protect your IRA. If you file bankruptcy, your IRA may be liquidated and used for paying off debts. Some of you might be concerned about this, but the Supreme Court, in 2005, has stated that Federal Bank Law protects individual retirement accounts (IRA) and that these will not be used to pay off debts. IRAs will remain unaffected even if you file bankruptcy. Hence, in such a case you may file bankruptcy.

You must weigh your options before you take any decision. Bankruptcy also has its cons:

• Most of your assets will be liquidated to pay off the debts. This may leave you mentally disturbed. Usually a feeling of failure creeps in with bankruptcy and moreover, it takes one back almost to scratches.

• Bankruptcy remains on your credit score for at least 7 to 10 years. This may influence lenders in the future. If you apply for a loan, your lender will ask you if you have ever filed bankruptcy. If yes, then he may be reluctant to lend you money or may charge a higher rate of interest. It may even affect your career. Your prospective employer might want to see how you are with handling money.

Before you think "Should I file bankruptcy?" think of other alternatives. Loan modification is the best alternative if your lender will co operate. First try and negotiate with your creditor if he is willing to modify your loan.