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Lifestyle & Budget

Debt Judgment May Trigger Bankruptcy

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Among the choices for dealing with a debt judgment, declaring bankruptcy is the nuclear option.

Bankruptcy is a powerful weapon for wiping out debt, but comes with serious consequences for the debtor who pushes the button. For help finding a bankruptcy lawyer check the National Association of Consumer Bankruptcy Attorneys website.

On the plus side, filing for bankruptcy halts collection action. A Chapter 7 proceeding generally wipes out unsecured debts, including debt judgments, while selling off your property that is not protected under state and federal exemptions. Under a Chapter 13 proceeding, debtors enter a repayment plan to wipe out a portion of their debts over three to five years.

"Having assets and income to protect are an important hallmark of a need to file bankruptcy," said Robert Lawless, law professor at the University of Illinois and member of the National Bankruptcy Conference. The average Chapter 7 consumer bankruptcy case filed in 2012 had nearly $116,000 in total assets and median monthly income of $2,764, according to the Office of U.S. Courts.  For the ins and outs of consumer bankruptcies, check the U.S. Bankruptcy Court's "Bankruptcy Basics." 

Costs for legal fees are typically around $1,500 or more, limiting the bankruptcy option. A study by the National Bureau of Economic Research found that the most cash-strapped consumers lack the funds to file bankruptcy. Other drawbacks include restrictions on filing bankruptcy again -- such as an eight-year wait for filing another Chapter 7 case -- and a 10-year demerit on your credit report.

For those reasons, bankruptcy may be more useful as a bargaining tool in settlement talks than as a plan of action. "If you pay back 10 cents on the dollar, that's still more than debt buyers are paying for the debt," said Rex Anderson, a consumer lawyer in Michigan.

Main story:  Court judgments for debt: after the gavel

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