Bankruptcy: What You Need to Know

Who doesn't love a good celebrity scandal? We must admit, we're just as guilty as the next person for glancing at the gossip magazines - but only because the headlines often have to do with ridiculous money mistakes celebs make. Ridiculous, but serious - and also completely avoidable. The latest in a long line of people to file for bankruptcy is Michael Vick. As an NFL quarterback, he's made millions. Granted, he's had some legal issues, but if these millionaires are in trouble of losing it all, you know there are plenty of other people in danger, too.

As much as we'd rather not see anyone declare bankruptcy, there are times when it is the best option. We know it won't be easy, so if you or someone you know is considering bankruptcy, we hope the information we pass here will help you.

Being in the position of considering any kind of bankruptcy is terrible. Yet being stuck with a lifetime's worth of bills is no way to live, and that is why we have laws that allow people to make a fresh start.

When you need a pick me up, consider the "harder they fall the higher they bounce" school of failure and success. Many famous people have declared personal or business bankruptcy and emerged successful again. Here are some you'll recognize:

• Mark Twain
• P. T. Barnum
• former Texas Governor John Connally
• Francis Ford Coppola
• Walt Disney
• Golfing great Jack Nicklaus was on the verge of bankruptcy in the mid-1980s after investors pulled out of two golf course developments his company started.
• Willie Nelson considered filing for bankruptcy after the IRS raided his Texas homestead on tax-evasion charges and confiscated everything in 1990. Only through the help of family and friends was he able to pull himself up.

Making the Decision

The first question is: "When should you file for bankruptcy?"

This is an important decision, so don't rush into it. Here's what we like to tell people as a guide: If you owe anywhere near a year's worth of take-home pay, you're in bad shape and bankruptcy might be your best option.

Notice we said "might." Make sure you talk with a credit counselor first and see if you can work something out short of bankruptcy. If not, a counselor will also be able to refer you to a bankruptcy lawyer, who will show you the ropes and represent you in court.

There are two types of bankruptcies available to us consumers: Chapter 7 and Chapter 13, both named for the bankruptcy code numbers that identify them.