10 things you should know before filing bankruptcy.

COULD IT BE THAT IN 10 SHORT YEARS, THE ULTIMATE financial taboo has become just another trend? One million people declared bankruptcy last year, twice the number of a decade earlier, and that figure is not inflated by business filings. Of the 300,000 bankruptcy petitions filed in U.S. courts during the 1996 fiscal third quarter, all but 14,000 were personal. Experts in the field say bankruptcy filings are growing so fast, it's almost as if the average debtor now sees bankruptcy as a financial panacea -- a carte blanche debt-free card.

Yet, for all the widespread publicity and the dozens of do-it-yourself manuals, misconceptions about personal bankruptcy still cloud this very serious matter. For instance, Keith, a 29-year-old computer operator from New York City, thought it was his only salvation three years ago when he graduated from college and found a tighter job market than he expected. Out of work and strapped with $12,000 in credit card debt and student loans, he decided to go ahead and start anew by filing for Chapter 7 bankruptcy protection. "Since I wanted to wipe out the entire debt at that point, I was convinced an extreme solution would be best," he recalls.

Finding a lawyer in the Yellow Pages was easy, and legal fees amounted to no more than $700. "I'd already made the decision to file after reading law books and talking to other folks who had done it," says Keith. So why is he haunted by hindsight even though he's squarely on his feet? For starters, he's barred from any line of credit for another four years. When he and his wife went looking for their new home two years ago, Keith knew his name couldn't appear on the mortgage, even though he can well afford the couple's monthly payment on his own. However, what really hurt was the realization that with his sterling credit record prior to the bankruptcy proceedings -- Keith never once missed a bill payment -- he might have had the opportunity to cut a payment deal with his creditors.

He now regrets not having looked at other options, especially since he found a new job just a month after filing. Looking back, he says his situation was not as urgent as he had thought: He wasn't behind on any payments and now realizes that his $12,000 credit card debt pales in comparison with the burden carried by many.

Keith's story underscores the importance of knowing what bankruptcy is and how to file properly. What's more, since African American consumers face historical barriers to fair lending, adding bankruptcy to our list of credit concerns can be the stroke that blocks a business loan, credit line or mortgage.

Unfortunately, an uncertain job market and the weight of carrying high-interest credit cards, mortgages and other lines of credit have led many people into dire circumstances. A recent American Bankers Association telephone survey found that 16% of respondents had been late with credit card payments in the last year. Issuer's less stringent lending policies have no doubt helped contribute to this trend. Still, experts say that many people, now more accustomed to the notion of bankruptcy, think it's an easy way out. For one thing, they may have seen people they know come through it and rebuild their credit without losing their house or car.

"Knowing someone who has filed in the past puts people at ease about filing themselves," says Charles A. Grundy Jr., a consumer bankruptcy attorney in Lexington, Kentucky. In fact, Grundy says that the attitude toward filing for bankruptcy has become so relaxed that he is beginning to see repeat filers. "These people don't fear bankruptcy at all."

Kim, a New Jersey dialysis nurse, didn't think twice until the day of her bankruptcy hearing in 1985. "I heard case in which people tens of thousands of dollars," she says. "I thought I could pay my debts and avoid filing, considering the $700 or $800 I was paying the lawyer." In 1995, a full 10 years after filing, Kim and her new husband were turned down for a mortgage; they swallowed hard when the broker cited her bankruptcy as the reason. Finding a lender became a nightmare that took the couple an extra year. "We had to write about eight involved letters to mortgage officers and underwriters just to explain what had happened, even though the bankruptcy should have been removed from my record. "It was really demeaning," she adds, "because we had to expose everything." And the problems didn't end there: Kim recently found out that a major credit issuer has refused to give her a card because of her past bankruptcy.

The following is a list of 10 important things to consider before filing bankruptcy. Pay careful attention to these points to avoid filing incorrectly or unnecessarily.

1. CHOOSING A CLEAN SLATE

OR STAGGERED PAYMENTS

One of the first things any book or lawyer will likely tell you is that there are two consumer bankruptcy choices at your disposal. The difference boils down to just what kind of debt you'll continue to carry and whether or not you'll work to pay off what you owe. Under Chapter -- bankruptcy, you can effectively wipe away any debt you have and start anew, but at the cost of selling off some of your assets -- your car, home, etc. The alternative, Chapter 13 bankruptcy, essentially allows you to devise a payment schedule for outstanding debt, one that best fits your budget. However, there's one thing that's the same for both filings: your credit report will carry a negative entry reporting your bankruptcy for 10 years.

2. FILING DOESN'T CLEAR

ALL YOUR DEBT

Under Chapter 7, you liquidate the unsecured debt you owe; in effect, it's a declaration that you have no plan to pay creditors back. Therefore, whatever you owe on credit cards and credit lines that the courts deem to be unsecured with no property attached to them will be swept away. However, student loans are priority debts and cannot be discharged if less than seven years old. In addition, secured debt on items that can be repossessed, such as a car or a washer-dryer set, are not covered and can be taken away.

Meanwhile, if you file under Chapter 13, you're proposing to pay back your debt over a 36-to-60-month period while retaining your property. "Typically, Chapter 13 payments can range anywhere from $250 to $500 a month, in addition to a filer's mortgage, car and other secured debt payments," says Jonnie Johnson-Parker, a Los Angeles real estate and bankruptcy attorney and chairperson of the Real Estate and Probate Law Section of the National Bar Association.

Once you file, you may think you can postpone mortgage payments for a later date. Think again. Thirty days from your filing date, you must recommence your mortgage payments. People are never aware that they will have to restart their mortgage payments, plus arrears, which includes payments you missed in the interim, any foreclosure costs and interests," explains Johnson-Parker.

Don't forget your lawyer has to be paid. For instance, Grundy's firm requires a client to pay a portion of their legal fees upfront in Chapter 13 cases. The rest is paid under the client's reorganization plan, with the court's approval, he explains. Conversely, when filing for Chapter 7, there's no payment plan because clients pay all fees upfront.

3. CHECK YOUR DEBT

THRESHOLD

You've got $9,000 in student loans and you're pounding the pavement looking for work. Your rent is overdue by a week or two and the stress has become unbearable. Even though things don't look good now, experts advise you to ride out the tough times as long as you can. This is especially true in the case of college students with little or no job prospects, who have recently taken to filing bankrupt once they graduate.

"These people are the last ones we want to file since they may be only $2,000 or $3,000 in debt, and their entire financial situation is likely to change for the better in a short period of time," says Grundy.

Experts suggest that $20,000 in debt is an acceptable benchmark for filing. Anyone with less debt should look for other ways to reduce their liabilities, suggests Johnson-Parker.

4. FILING DOESN'T MEAN

YOU'LL BE DECLARED

BANKRUPT

As bad as your budget may seem, remember this: not everyone who petitions the court is declared bankrupt. Unless you choose a great lawyer who counsels you beforehand, you may have no clue to the outcome of your filing until court papers and checks to your attorney have been processed. In fact, filing for bankruptcy will stay on your credit record even if it doesn't result in bankruptcy, warns Edward Sparkman, the Chapter 13 Standing Trustee for the Eastern District of Pennsylvania. And while it's illegal for employers who view your credit report to use your bankruptcy against you in a hiring decision, the fact is they still know it's there. You may never know why you were turned down.

5. FILING SOONER ISN'T

ALWAYS BETTER

As great as the urge to wipe away your entire debt might be, Sparkman advises that waiting "until the sheriff knocks down your door" is your best plan of action. Why wait? Since bankruptcy leaves a lasting blemish on your records, you should give yourself every opportunity to find an alternative means of reducing your debts, advises Sparkman. That includes getting a loan from a friend or family member to pay back what you owe. Or getting help from a credit counselor who can help you contact creditors to work out a payment schedule to their satisfaction. Also, over time, your chances of landing a better job or even coming into a windfall from an inheritance increases.

6. YOU'LL PROBABLY STILL

NEED A LAWYER TO FILE

It seems simple: Save the bucks and skip the lawyer by buying a book. Before you pinch pennies, however, it might pay to look closely at the introductions and prefaces to the many do-it-yourself bankruptcy guides out there. Publishers make absolutely sure that each edition comes with numerous disclaimers and footnotes advising you to consult a lawyer if your situation strays from the book's examples in any way. And more than likely, your individual case will be different from the examples in the book.

Another problem with at least some of the do-it-yourself books now on the market is that they don't explain well enough the difference between secured and unsecured debts, which are treated differently in your filing. Many also lack adequate explanation of the formula you must use to pay back your debt under Chapter 13. Then, there is a thicket of local laws that complicate things even further.

So while the books might be good for telling you what you can expect, don't count on them to walk you from filing the paperwork to the final gavel of a proceeding. There is one circumstance, however, where they can indisputably help. Chapter 7 proceedings basically require no more than a filing, a creditor's meeting or a court date, and finally a letter in the mail settling the discharge of your debt. "In 80% of the Chapter 7 cases, you won't have a hearing or see a judge," says Stephen R. Elias, co-author of How to File for Bankruptcy (Nolo Press, $26.95; 800-992-6656). "Our book is for that 80%," he says.

Online, you'll find that the American Bar Association's Web page (http://www.abanet.org) contains wide-ranging legal advice, including a listing of lawyer referral services. (The ABA's service number is 800-285-2221.) Nolo Press has a Self-Help Law Center Site (http://www. nolo.com). America Online subscribers can even post bankruptcy questions on a messageboard at the site. For access, select Nolo using AOL's keyword option. "We usually answer questions posted there in a couple of days," says Elias.

Meanwhile, Bit Legal Software offers a program called Total Bankruptcy 4.0 that lets anyone with a PC generate bankruptcy schedules at home. The Dallas-based company (214-904-0529) also has ahomepage (http://www.whytel.com: 80/home/eorne/TB/index.html).

But there's no substitute for a good lawyer. He or she will be instrumental in helping you decide whether you should file and the appropriate type of filing for your circumstances. Grundy and Johnson-Parker say they hold in-depth debt-assessment sessions with potential filers before they become clients. "I conduct a free initial consultation," says Grundy, "during which I sit down with debtors and get a rough picture of their debt situation." There is also a lot of explaining to do before the filing. "For instance, if you purchased a car, never made a payment and then filed for bankruptcy, you can bet that creditor is going to want that property back," says Grundy.

After talking things over with clients, Grundy then lets them "go home and think over their decision.

If they want to become our client, we provide them with an educational package on bankruptcy and a list of the information we'll need to file a petition for them. All the while, it's continuous counseling."

7. DON'T SETTLE FOR JUST

ANY LEGAL ADVICE

Unfortunately, an attorney specializing in consumer bankruptcy may prod you to file even when there are alternatives. Our two examples at the beginning of this article, Kim and Keith, both paid a flat $700, a fair market price, for legal advice. Still, their attorneys failed to take the positive step of counseling them on whether to file. To avoid being railroaded into a bankruptcy filing you might well have avoided, call your local bar association for help in finding a reputable attorney. Depending on where you live in the U.S., expect to pay anywhere from $500-$1,200 for a basic Chapter 7 bankruptcy. But keep in mind that other factors may drag out the time the lawyer may spend on your case. For example, his or her efforts to fight off a creditor could mean extra billings above the basic fee. You should find out upfront what extra costs may be involved, and work with the lawyer to anticipate any extraordinary circumstances.

8. FILING IS CHEAPER THAN

YOU THINK

If you're concerned about the costs of a bankruptcy proceeding, you might seek out free or low-cost legal services. Filing for bankruptcy is your constitutional right, one that many organizations and city agencies help fund through programs they offer for those that qualify. "Bankruptcy is an option that's always been there for people who can afford a lawyer. Now firms that provide pro bono services are seeing an increase in demand for such services," says Julia Gordon, deputy director for the National Association for Public Interest Law in Washington, D.C.

To determine the kind of help you'll need, contact a credit counselor through the National Foundation for Consumer Credit (800-388-2227). Another avenue is a service like Tele-Lawyer (800-835-3529), which lets you speak with a lawyer who specializes in your topic or situation. The cost is $3 a minute.

9. YOU CAN CANCEL YOUR

FILING ANY TIME

Filing for bankruptcy is by no means an irrevocable act that binds you to a course of action, particularly if your circumstances change. Experts say you'll have plenty of time to back out before your court date, even if you've already filed a petition. Putting a halt to the proceedings is simply a matter of paperwork. "In the period before I filed, all the creditors I listed sent letters asking me to work out a payment plan," says Keith, who now wishes he might have considered their offers.

Another example is that of a Baltimore doctor who tried to file to have student loans discharged after finding them impossible to pay off on his $90,000-a-year salary. His first attorney advised him to file under Chapter 7. This was bad advice, however: the doctor's loans weren't seven years old and therefore not eligible to be discharged under bankruptcy. He still didn't know that he couldn't discharge the debt when he hired me," says Michael O. Ramsey, a Baltimore bankruptcy attorney now advising the doctor. Time was wasted with a petition that legally couldn't be filed, and now the doctor's debts are 10 years old. And it's a matter that will still haunt the poor physician for some time because under law he must wait another seven years before filing again. Meanwhile, the doctor's debt has grown from $80,000 to more than $300,000 while the case has dragged on and the legal fees accumulate.

10. IF YOU FILE, CREDIT

WON'T BE EASY

TO COME BY AGAIN

The perception that it's now easier to get credit after filing bankruptcy may stem from the availability of certain secured credit cards, says Linda Revelle, a counselor for the Consumer Credit Counseling Service of Delaware Valley in Philadelphia. However, getting an unsecured card, a car loan or a mortgage is impossible for several years, says Keith, whose travails provide the best caveat. In Grundy's words: "It's better to have a few late payments on your record rather than a full-fledged bankruptcy."