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Debt consolidation

Bankruptcy

Bankruptcy should be the last option for solving your debt problems.  Declaring bankruptcy will put a negative mark on your credit report for the next 20 years!  Obtaining any type of loan will be difficult or disadvantageous.  Even applying for a job or leasing a car can be adversely affected by a bankruptcy listing in your credit history.  Going through bankruptcy is no picnic either - you must deal with repossessions, court and lawyers, and the complete monitoring of all your financial activity.

Bankruptcy is government protection from your creditors.  This protection comes in the form cancelling interest or limiting the level to which your creditors can pursue you for money.

Under one main form of bankruptcy, Chapter 13, interest may be frozen over a 3-5 year timeperiod for you to pay back the debt.  The court acts between you and your creditors, forcing agreement on a repayment plan.  This plan includes reduced or zero interest, likely a reduction in balance of the debt, and a strict payment structure you must adhere to.  In the Chapter 13 process, you must provide evidence of your employment and ability to meet payment requirements over the next several years.

Under another type, Chapter 7, your assets are liquidated. Chapter 7 bankruptcy is the closest thing to a fresh start if you are under enormous debt.  The tradeoff - financial institutions may never again offer you credit except at extremely high interest rates.  In the Chapter 7 process, the court groups all your creditors together, then disburses your liquidated assets to them fairly, at which point your debt is gone.  Note that some types of debt, such as payments demanded by a previous court, are not eliminated by Chapter 7 bankruptcy.  In the liquidation process, the court will not allow you to lose the essential means to sustenance for you and your family.  Thus, other the ongoing stigma of Chapter 7 on your credit history, you are given the opportunity to start without the burden of your previous debt.

How do they make their money?  Attorneys profit from the bankruptcy process. 
CURRENT -  You owe $20,000.
BANKRUPTCY - Your assets sold for $4,000.  $1,000 goes to attorney, $3,000 split among creditors. 
YOUR FUTURE -  Financial startover, but with Bankruptcy mark visible to any potential creditors.