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Financial distress: a problem with a solution

Many people view bankruptcy as a last-chance effort to save a failed life. However, that is not the case. Often, financial problems necessitating bankruptcy are not the result of poor decisions. Sometimes people are not financially prepared for a major life change such as unemployment, divorce or illness. This can take a toll not only on a person's psyche but their bank account.

Chapter 7 bankruptcy is a process that discharges unsecured debts and is not for someone who thinks they can pay their debts back within five years. The process was made a bit more complicated by the Bankruptcy Abuse Prevention and Consumer Protection Act in late 2005. In order to more aggressively pursue repeat filers abusing the system, the bill made changes to U.S. bankruptcy law.

Now a filer must pass a means test to file for Chapter 7 bankruptcy. If their income level places them in the top 50 percent of households their size, then monthly income is examined based on the last six months. If that income is over the median income, then the second part requires expense deducting according to Internal Revenue Service guidelines.

Also added by the BAPCPA is the required credit counseling. While it may seem like a chore, the credit counseling actually does help people become more financially responsible and prepared. A person's filing can be denied if they do not complete the counseling.

Though there are more steps and the process is more expensive, filing for bankruptcy is still a good solution for those who cannot pay back their unsecured debts. Credit scores can be repaired and a clean slate can be had.

Source: Charleston City Paper, "How to File for Bankruptcy," T. Ballard Lesemann, Dec. 31, 2011

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