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What to consider when filing for bankruptcy

People in Massachusetts who are struggling with debt may hesitate to file for bankruptcy because of the associated stigma. According to a report from the Notre Dame Law Review, however, waiting to file for bankruptcy can land people in even more difficult financial circumstances.

The study identified a point prior to filing for bankruptcy when people were sometimes unable to afford basic necessities such as food or faced debt collection lawsuits and asset depletion. More than two-thirds of the people surveyed spent at least two years in this stage, and almost a third spent five or more years in this stage.

Staying in this stage longer led to worse financial outcomes. For example, compared to other debtors who filed for bankruptcy in under two years, they had half the median assets. Their median debt-to-income ratio was more than 40 percent higher compared to other debtors. Unfortunately, this can hamper efforts to make a fresh start.

Experts suggest filing for bankruptcy when debts comprise over 40 percent of one's income, when a person is using debt to pay other debt or when the debts are those that can be discharged in a bankruptcy. An individual may qualify for Chapter 7 or Chapter 13 bankruptcy.

With both types of bankruptcies, the debtor may keep some assets. A Chapter 7 bankruptcy allows one to keep certain necessities. With a Chapter 13 bankruptcy, a person works out a payment plan to repay creditors over three to five years. Since filing for bankruptcy puts a stop to any creditor actions, such as foreclosure, one might be able to keep a house with a Chapter 13 bankruptcy. The repayment of debts is supervised by a trustee.

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