Bankruptcy: a Drastic Step but Sometimes the Wisest One

John Ventura is on a mission to inform consumers about their credit, debt and rights in a bankruptcy.

The director of the Texas Consumer Complaint Center at the University of Houston Law Center, where he is an adjunct professor, is also a bankruptcy lawyer with 30 years of experience. He is alarmed by what he sees going on inside and outside bankruptcy court.

Since bankruptcy laws were changed in 2005, the number of filings has increased around 40 percent, Ventura said.

Before the law changed, bankruptcy lawyers would routinely help a consumer for the cost of the filing fees plus $200, he said. But the cost of filing skyrocketed as the law became more complex. The effect is that those who can least afford it must pay more to their lawyers to file the necessary papers.

Part of the problem is that consumers don't understand when they're able to file, or what debt will be discharged if they do go through a bankruptcy. Ventura, author of "The Bankruptcy Handbook: Everything You Need to Know to Avoid Bankruptcy, Get Rid of Debt and Rebuild Your Credit," said consumers are confused and scared by what they see as a last-ditch effort to get on the right side of their debt.

Consumers typically can file for two types of bankruptcy, Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is a complete liquidation of debt. You can file for this kind of bankruptcy to wipe out most of your debt. A Chapter 13 bankruptcy helps you reorganize your debt. Consumers get three to five years to pay off most of their debts.

If you owe more than $336,970 in unsecured debt (such as on credit cards) or more than $1 million in secured debt, you'll have to file for a Chapter 11 reorganization. If you're a farmer, you'll file under Chapter 12 of the bankruptcy code.

Before you are even allowed to file, you are required to get a certificate of compliance, which essentially means you have gone through a pre-bankruptcy counseling session with a certified counselor. This costs about $50, Ventura said.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 also requires you to go through a debtor education class while you're in bankruptcy. The class lasts two hours and costs up to $100, although you can ask the credit-counseling agency to waive the fee.

While filing won't solve all financial problems, it is the right move for many, Ventura said, especially those facing foreclosure.

He suggests that you "run" to a bankruptcy attorney if you are about to lose your home in a foreclosure, you think you are at risk of having your car repossessed, your creditors are threatening you with legal action, or the IRS is threatening to collect past-due federal taxes by garnishing your wages, putting a lien on one of your assets, intercepting your federal tax refund or taking some other action.

You should also file for bankruptcy if "your wages are already being garnished, and if your state's child-support enforcement office is about to seize one of your assets, take money from your bank account, intercept your state or federal tax refund, or take some other action to collect your past-due child-support debt," Ventura writes in his book.