When Is Bankruptcy the Answer?

Detroit's financial woes have placed the issue of bankruptcy in the national spotlight. Yet, for many Americans, who are still struggling to get back on their feet amid high unemployment and expensive medical bills, bankruptcy is all too familiar.

Though bankruptcy filing rates have fallen 14 percent in the last year or so, experts say this isn't necessarily a sign that the economy is improving -- this sustained decline may be due to decreased consumer borrowing after the 2007 housing market collapse.

But one troubling study released last year shows that racial bias may also play a factor in how bankruptcies are filed. It suggested that blacks were more likely to be steered by lawyers toward a more costly and complicated form of consumer bankruptcy, even when they had identical financial situations as white filers. Bias persisted even when adjusting for things like income and education.

Such racial biases are unfortunately present throughout the financial services industry, with predatory mortgage and auto lenders tending to steer people of color toward more costly loans. Changing these institutional biases will require fostering greater accountability and transparency within the financial sector. But consumers who are considering filing for bankruptcy can also arm themselves with knowledge around all the available options.

First, ask yourself if it's beneficial for you to file. Bankruptcy can help discharge some or most of your debts, stall foreclosure of your home, reposes your car, and allow you a chance to catch up on missed payments.

On the other hand, bankruptcy doesn't absolve your secured debt, including car loans and mortgages. And it also doesn't allow you to discharge certain other debts, including alimony, child support and student loans.

Additionally, bankruptcy does not allow you to discharge debts that arise after you have already filed. So, if you foresee significant expenses in your future, you may want to wait until you're sure that you're not going to incur any new debt.

Keep in mind that bankruptcy can remain on your credit reports for ten years and will probably impact your ability to secure a loan in the future. And if an employer runs a credit check on you before hiring, it may even impact your ability to get that job.

If you do decide to file, you're legally required to meet with a credit counseling agency to discuss your options. Be very careful about the agency you select, because many of them are financial scams that might leave you worse off than you were before. The National Foundation For Credit Counseling offers a list of guidelines to help you get started.

Filing for bankruptcy isn't the right answer for everyone, and it isn't a cure-all. Doing your homework and consulting a reputable counselor before filing will ensure that you make the decision that will give you the greatest financial benefit in the long-term.