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When it's time for personal bankruptcy in California

Many consumers try to stay clear of bankruptcy, since it has been known to have a negative impact on their credit scores. In spite of the negative stigma personal bankruptcy has received, however, it's sometimes the only way out for some California consumers. There are ways consumers can determine if bankruptcy is their best option.

One way to tell if bankruptcy is a suitable option is if a consumer's financial situation will not allow them to pay their debts. The amount they owe is significantly higher than the amount available in assets. This is a situation in which a person just does not have enough income to cover their debts -- not because they do not want to pay. Another way to tell if bankruptcy is suitable is if a consumer has already considered all other options. Some consumers have thought about taking equity out of their home to pay down their debt, but the issue is that they stand the risk of losing their home in the end.

Another way to tell if it may be time to consider filing for bankruptcy is if a consumer has attempted credit counseling, which is a program designed for those in financial hardship. A credit counselor analyzes a person's financial circumstances and guides them through debt-relief options. Consumers generally speak with the counselor on the phone or through online meetings.

People who have considered or tried other options to reduce their debt with no success may want to file for personal bankruptcy, and there are options available to California consumers, depending on an individual's situation. Chapter 7 bankruptcy allows consumers to eliminate all their debts, and consumers who file Chapter 7 usually do not have many assets. Chapter 13 works differently and is more suited for those who have a certain amount of income. These consumers are required to pay their debts off within 3 to 5 years under a repayment plan. Learning about these options can help consumers make an educated financial decision.

Source: The Motley Fool, How to Know When Bankruptcy Is Your Best Option, Katherine Muniz, Jan. 26, 2014

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