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Overwhelming debt can discourage even the most positive people. Chapter 7 bankruptcy can offer the fresh start people, being crushed by debt, the financial lifesaver they need. While not always the best option for Miami residents in financial turmoil, the primary alternative, Chapter 13 bankruptcy, may or may not be a better choice.

The primary feature of Chapter 7 bankruptcy involves wiping out all of your current debt. However, with this elimination of debt comes the obligation to sell many of your personal possessions and use all of your available cash, stocks and real estate, other than your primary residence, to satisfy creditors. Sometimes, Chapter 13, which usually allows you to keep your assets, is at times more beneficial.

However, Chapter 13 bankruptcy might last for years, as you complete a repayment program for your creditors. Conversely, another Chapter 7 benefit is speed, as most cases are complete in three to six months. When you want to move on with your life quickly, the Chapter 7 resolution timeline becomes more important.

Be aware that federal modifications in 2005 make it more difficult to qualify for Chapter 7 bankruptcy. You must pass an “earnings test” similar to bankruptcy law prior to the 1970s-era federal changes. You must prove to the court that your income makes it impossible to pay off your current creditors. Removal of the earnings test led to more strategic bankruptcies, even during strong economies. Congress eliminated this perceived loophole with its 2005 revisions to federal law.

If you qualify, however, Chapter 7 bankruptcy can be the lifesaver you need to jumpstart the rest of your financial life. Should you make the very personal decision to file for Chapter 7 bankruptcy protection, use this fresh start to your advantage to manage your finances better in the future.

How do you view bankruptcy protection? Would you use Chapter 7 if you had debts you simply could not pay to restart you economic life?

Source: Reuters, “Is Chapter 7 Bankruptcy Right for You?” Andrew Lu, July 27, 2012