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Carolina in the Morning: Legal Advice 3.16.04

Thom Goolsby on Bankruptcy

In Debt? Look Before You Leap into Bankruptcy

Be sure you look before you leap into filing for bankruptcy

a serious step that should only be taken as a last resort

Last week the government reported that personal bankruptcy filings in 2003 rose 5.3 percent in just a year. Whether debt problems were the result of losing a job, a divorce, an illness, or simply overspending, more than 1.6 million Americans chose bankruptcy as the way to solve their financial problems. Although record numbers of consumers are filing for bankruptcy protection, experts warn that you need to consider all of the options before going to bankruptcy court. Here's a look at some alternatives to bankruptcy, and some advice to help you determine when bankruptcy may be the only reasonable choice.

       
Bankruptcy may not be right for you
Filing for bankruptcy is a serious step that should be taken only as a last resort, and only after weighing the pros and cons with an attorney experienced in bankruptcy law. The fact that you filed for bankruptcy will stay on your credit record for 10 years, while unfavorable information in your credit file will stay there for only seven years. A bad credit report will make getting credit in the future more difficult.

For example, a credit record with unfavorable information may make it more difficult for you to get a mortgage for your house, to rent an apartment, or to obtain a car loan. In addition, bankruptcy does not necessarily erase (or “discharge”) all of your debts, which means that you will remain liable for most taxes, alimony, child support, and student loans even after going through the bankruptcy process. If you are young, a bankruptcy on your record may prevent you from getting a loan for a business venture until your 30s or 40s. If you are over 50 and want a loan for a new venture, having the bankruptcy on your credit record for 10 years is an especially long time and may prevent you from ever getting into that new venture since you may not be able to get credit until too late in life.

Alternatives to bankruptcy
Most consumer credit counselors agree that talking to your creditors is a necessary first step to resolving your debt problems. Most creditors want to help you repay your debt. By explaining to them the reason that you have fallen behind in payments (such as divorce, losing a job, or an illness), many creditors may be willing to work with you to satisfy your obligation.

Some creditors might be willing to settle their claim for a smaller cash payment that they get right away. Other creditors might be willing to stretch out payments so long as you are making a good faith effort to meet, rather than to avoid, your financial obligations.

If you have many creditors, consolidating your debts may be an attractive alternative, especially while interest rates remain low. The problem with dealing with many creditors is that some of them might not want to give you more time to pay without knowing what the other creditors are willing to do. By consolidating your debts, you only have to deal with one creditor.

    • The primary danger of this approach is that if you use a credit card or take out a second mortgage on your home to consolidate your debts, you may be risking more in the long run if you can’t meet your monthly payments.

A creditor understands that if you don’t pay, he will have an expensive and time consuming effort on his hands to collect the debt. Forcing you into bankruptcy may mean that he collects little or nothing on the debt in the long run.

Digging out of the hole
Debtors who are unable to get their finances back on track themselves may want to turn to a debt counselor. The more than 1,000 accredited non-profit agencies of the National Foundation for Credit Counseling, help 1.5 million households annually. Certified counselors at agencies like these help clients make budgets, cut spending, and negotiate with creditors to lower payments. Reputable agencies tailor payment plans to the circumstances of each client, sometimes offering services for free.

But be careful because many of these debt counselors are not reputable. Get references and don’t give personal information until you are confident that the counselor works for a legitimate entity. Beware of unsolicited e-mail making spectacular claims to take care of all of your debt problems quickly and easily. In addition, beware of high fees or required "voluntary contributions" that, with high monthly service charges, may add to your debt and defeat your efforts to pay your bills.

If bankruptcy is the only answer
As a last resort, many people see no way out other than bankruptcy, and there are several advantages to filing:

    • The most important is that you obtain a fresh financial start when the bankruptcy is over.
    • In addition, collection efforts must stop as soon as you file, and you may be able to keep what are called “exempt” assets (each state has laws defining what these exempt assets are). That means that not all of your assets will be sold to satisfy your debts. If, for example, you are a senior living on social security, a pension or you are receiving other retirement benefits, there is a good chance that you will be able to keep most of these in a bankruptcy because these are deemed to be “exempt” assets (with some exceptions).
    • Finally, you cannot be fired from your job solely because you filed for bankruptcy.

There are essentially two types of bankruptcies available to consumers:


A “straight bankruptcy” under Chapter 7. This type of bankruptcy involves taking most of your property. After filing the bankruptcy petition, the court appoints a trustee to sell your non-exempt assets and to distribute the cash received among your creditors on an equal basis. After the creditors have been paid, even if they have not been paid in full, you are no longer liable for these debts. You then start over again with a clean financial slate
except that the fact of the bankruptcy will remain on your credit record for ten years.

A “wage earner’s bankruptcy” under Chapter 13. This type of bankruptcy allows individuals who have steady incomes to pay all or a portion of their debts under the protection and supervision of the bankruptcy court. Under this option, you file a bankruptcy petition and a proposed payment plan with the bankruptcy court. The repayment period is up to three years (five years with the special permission of the court). An important feature of Chapter 13 is that you will be permitted to keep all of your assets while the plan is in effect and after you have successfully completed it.

Steps to help you analyze debt problems and consider alternatives:

Talk with your creditors. Many creditors will want to work with you rather than forcing you into bankruptcy.

Contact a credit counseling service. These organizations work with you and your creditors to develop debt repayment plans. Such plans require you to deposit money each month with the counseling service. The service then pays your creditors. Some non-profit organizations charge little or nothing for their services.

Beware of scams. Unsolicited e-mails making wild promises to get you out of debt quickly may be a method for obtaining a large, up front fee or a disguised way of stealing your identity. In addition, it is illegal to represent that negative information, such as bankruptcy, can be removed from your credit report. Promises to "help you get out of debt easily" are a red flag. Be especially wary of these offers.

Carefully consider consolidating your debts. While loans are often available to consolidate your debts, they also may require you to put up your home or some other assets as collateral. Be sure that you can make these monthly payments before opting for a consolidation loan.

If all else fails, consider bankruptcy. To weigh the pros and cons of filing for bankruptcy, be sure to contact a lawyer experienced in bankruptcy practice.

Help is available:

To contact the National Foundation for Credit Counseling 24-hour hotline, call 800-388-2227 or access it on the Internet at: www.nfcc.org.

To contact the Consumer Credit Counseling Service in your area, call 1-800-388-2227 or access its web site at www.cccservices.com.

To find a lawyer to help you weigh the pros and cons of bankruptcy, check with your local or state bar association and ask for the name of lawyers who specialize in bankruptcy practice. To find the name of a lawyer referral service in your area, access its web site at http://www.abanet.org/legalservices/lris/directory.html.

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