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NEW YORK (MainStreet) — Kristina McKinney was left with no recourse when her mother used her identity and rented six apartments during her stint in the army, leaving her on the hook for the unpaid rent.

When the creditors started garnishing her wages, McKinney, 23, who is now a manager at a Walgreens drug store in Colorado Springs, Colo., faced only two heartwrenching options - file a police report and send her mother to prison for fraud for the leases she signed over five years or file for bankruptcy. Unable even to obtain a cell phone contract or rent her own apartment because of the debt, McKinney decided her only option was to file for Chapter 7 in January.

“I feel like I did the right thing even though it sucked,” she told MainStreet. “The debt made me look like an irresponsible person.”

“I don’t have that much to my name, but I did it more so that we could survive since I am about to have a baby,” she added.

While many Millennials and Gen X-ers may have more debt than assets, they should determine if they need to file for bankruptcy

Seek Counseling Before Filing

McKinney sought the free advice of a free credit counselor from Transformance, a member of the National Foundation for Credit Counseling, which provides free or low-cost credit counseling for consumers.

“She was super nice and talked me through the process,” she said. “She made me feel like I had options and didn’t treat me as though I was stupid.”

In 2011, McKinney’s car was totaled during a car accident, and because she did not purchase gap insurance, she still owed $13,000 out of a $23,000 car loan. The auto loan, plus the thousands of dollars she owed the creditors of the six apartment buildings, meant that she would have “been in debt forever,” she said.

“I am not a hateful person and did not want to file a police report and send my mom to jail,” McKinney said. “The apartment debt made it impossible for me to climb out of debt without filling charges against my mom.”

Consumers are required by law to seek pre-filing bankruptcy counseling, which can “expose them to other options such as a debt management plan, settle with creditors or not pay the debt at all,” said Catherine Carter, a Colorado Springs, Colo. branch manager for Transformance, a member of the National Foundation for Credit Counseling, which provides free or low-cost credit counseling for consumers.

Deciding Whether to File for Chapter 7 or 13...

Most consumers should seek the advice of a credit counselor or bankruptcy attorney before they file for Chapter 7 or 13 to learn the consequences of each type of filing on their credit report, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization. Filing for Chapter 7 means the unsecured debt will be discharged while filing for Chapter 13 results in a situation where consumers pay their debt for a number of years before having a certain portion of that debt being discharged, he said.

“All of this has a large cumulative negative effect on their credit rating and the bankruptcy will stay on their credit for seven to ten years,” he said.

When the law changed in 2005, consumers now have a harder time filing for Chapter 7 to have all their unsecured debt discharged. Both private and government-backed student loans are not included if consumers file for bankruptcy with very few exceptions.

Individuals who file for Chapter 13 have to pay a portion of their debt back and are typically on a five-year plan, said Carter. Depending on their income and reasonable living expenses, a portion of the debt is paid each month and could be as low as $50 a month.

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Consumers should be prepared to gather documents such as paycheck stubs, tax returns and bank statements whether or not they seek the advice of an attorney, said Ryan Dove, a Houston bankruptcy attorney.

"All of these personal documents will be used to help create their bankruptcy documents," he said. "Some of these documents are required to be filed with the court as a part of the case and/or sent to the bankruptcy case trustee."

Consequences of Filing for Bankruptcy...

Filing for bankruptcy is not for the faint-hearted because the consequences are long-lasting and can impact your credit score for up to 10 years, making it challenging to receive credit with lower interest rates to buy a car or house or obtain credit cards.

“Declaring Chapter 7 bankruptcy comes with immediate and long term consequences,” said Bruce McClary, a spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization. “In the short-term, it becomes challenging to obtain credit approval from prime lenders and impossible to finance at the lowest rates.”

While consumers can be approved for a loan or credit card after a bankruptcy is discharged, the cost of “borrowing becomes steep,” he said. If a consumer’s loans and credit cards become delinquent once again, the options are more limited.

Consumers who wait 24 months after their bankruptcy has been discharged, which means it was accepted by the bankruptcy court, can access credit again from credit card companies and some mortgage and auto loan lenders. Depending on the car dealership, interest rates can be as high as 21%, Carter said.

“Some lenders will consider giving consumers a mortgage or auto loan," she said. "It can be done, but they pay a really high interest rate. Waiting 24 months is a good guideline for getting any type of credit to receive decent interest rates.”

Rebuilding your credit score slowly is the best course of action because the ramifications are steep. Examine your current your household budget first and seek “entry-level credit options which can be used to establish a new record of timely payments,” McClary said.

“Keep the balance well below the assigned credit limit, monitor your credit and score regularly and look for opportunities to qualify for better credit terms as the score increases,” he said.

Other Options...

A good deterrent to filing for bankruptcy is following through with a Debt Management Plan (DMP), which is a plan in which the creditors will accept lower payments, decrease interest rates and stop collection activity including late and over limit fees, Triggs said. This plan allows the consumer to pay off their unsecured debt based upon their income and get out of debt within five years. Consumers should sign up for the plan through a non-profit credit counseling agency.

The consequences for entering this agreement is also severe and means consumers must be ready to change their current spending habits. Consumers are required to stop using their credit cards and close the accounts. In addition, they must make one or two payments to the credit counseling agency monthly and the agency disburses that money to the creditors, he said.

Even though a DMP also affects a consumer’s credit score and report, the impact is minimal and a result of the closure of the credit card accounts.

“It’s usually nowhere near the impact that a bankruptcy will have on their credit score and often not much of a negative impact at all,” Triggs said. “Their credit score doesn’t get killed.”

The hard lesson that McKinney learned was “don’t trust everybody and make sure you check your credit report at least once a year,” she said. “It’s tough to be so trusting, especially when it comes to your credit,” she said.