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Fewer individuals file for bankruptcy

In 2011, nearly 1.5 million Americans and more than 30,000 businesses nationwide filed for bankruptcy, according to statistics out of the American Bankruptcy Institute. Although those numbers are higher than previous years, financiers say a positive spin can be cast on the information, as the number of individual bankruptcy filings has decreased by about 10 percent during the past year.

Most people who go through bankruptcy choose the Chapter 7 option, which is a full liquidation of assets. After the filing has been accepted into the court system, an automatic stay is granted that prevents creditors from pursuing additional action. Then, creditors receive information about potential repayment terms, if any have been decided.

In contrast, Chapter 13 bankruptcy involves the mandated repayment of certain debts. Most people who use this type of bankruptcy fail to meet the requirements of a means test. That test determines whether the individual's or business's assets outweigh its debts. If more assets are present, then a repayment plan is created instead of liquidation.

Chapter 13 bankruptcy terms are generally structured over about five years, with individuals reporting to a trustee who helps govern the repayment process. Creditors are allowed to negotiate and comment on the repayment plan and any remaining debt left after the repayment is typically discharged.

There are many reasons to file for bankruptcy. Some people simply fall upon financial hardship after losing a job, others may be going through a divorce and some realize their unsettling financial situation after overspending in their youth. Older people are sometimes caught in high interest loans that they did not understand, which can also compromise their financial health.

Regardless of your reasons for requesting bankruptcy, many options remain available to you for improving your credit score and getting back on track to financial solvency. Consider whether Chapter 7 or Chapter 13 bankruptcy is best for your situation.

Source: CBS News, "Number of individual bankruptcy filings drop," Ray Martin, Sept. 11, 2012.

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