Bankruptcies are on the rise and unfortunately, because of the current state of the real estate market, this trend most likely will continue. With new bankruptcy laws in force, filing is much more difficult and expensive. If you are considering filing for bankruptcy, the Law Offices of Vernon L. Ellicott recommend you do your homework before making this very critical decision.

When to file

Not everyone is eligible to file bankruptcy. Filing depends on your income to debt ratio. For example, if you owe 25 percent of your gross annual income in credit card debt, this is considered solvable and with a practical plan is debt you can work hard to pay off. However, if you owe 60 percent or more of your gross annual income in credit card debt and medical bills, this changes your circumstances dramatically.

Filing options

For individuals there are two bankruptcy options — Chapter 7 and Chapter 13. Recently, bankruptcy laws were changed and as a result, filing Chapter 7 has become increasingly more difficult, forcing most individuals to file Chapter 13, which is a longer process.

Under Chapter 7 all unsecured debt is discharged and you are usually allowed to keep certain property, such as your home or car. However, you are required to continue payments on these secured loans. Filing Chapter 7 is less expensive and typically in less than six months your unsecured debt is discharged.

Under Chapter 13 you are allowed to keep all your property and you are required to repay unsecured creditors a portion of what they are owed over a five year period. A payment plan is created and payments vary from $100 per month or more, depending on your income and expenses. With Chapter 13, more court appearances are mandatory as well.

Bankruptcy rulings

What most people may not realize is that bankruptcy filings are reviewed by a bankruptcy trustee. A judge then grants or denies the bankruptcy based on the trustee's findings.

Legal representation

Having an attorney is recommended when filing for bankruptcy. The laws are constantly changing and the process can be complicated and is best left for the experts to handle. An attorney offers peace of mind during what can be a very stressful time in your life.

Bankruptcy will affect your credit

Bankruptcies typically stay on your credit reports seven to 10 years. Most people will have difficulty obtaining credit within one year of the bankruptcy and will be forced to buy big ticket items, such as a car, at higher interest rates with at least 20 percent down.

How to avoid bankruptcy

The three major causes for bankruptcy are credit card debt, medical expenses and rising interest rates. One of the best ways to avoid bankruptcy is to practice fiscal responsibility. In other words, if you cannot afford to pay cash for an item or pay off your credit card in 30 days, don't buy it.

Secondly, beware of interest rates that are too good to be true. This is a tactic used by some lenders. They offer teaser rates to customers who might not otherwise be able to afford to buy a home.

Unfortunately, when the interest rates become fully indexed, most homeowners cannot make the payments.

The good news is, there is life after bankruptcy. And, the good news is — it offers individuals a fresh start.

(Vernon L. Ellicott is an attorney and Certified Family Law Specialist. For more information about bankruptcy visit the Web site at www.vlelaw.com or call 446-6262. His law offices are in Westlake Village and provides a broad range of services in the areas of family law, bankruptcy, select personal injury cases and select criminal law cases.)