In Debt? Look Before You Leap into Bankruptcy
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.
- 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.
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.
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.
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: