You have several credit cards maxed out, you have automobile loans outstanding, plus a large mortgage on your home. You’ve been juggling the credit cards by making cash advances on one to make minimum payments on the others. Your auto loans and the mortgage are past due and you’re getting a lot of heat from your creditors. Is it time to consider a bankruptcy filing?
So what do you do? File bankruptcy and walk away? Not so fast. Let’s see what a bankruptcy filing entails. Firstly, don’t even think of going to the local office supply store and buying one of their bankruptcy kits for a “do it yourself” filing. Bankruptcy is a legal proceeding and you will need to hire an experienced attorney. Depending on the “size” of your debts and assets, you will pay him, up front, several thousand dollars as a retainer to begin work.
The bankruptcy laws changed back in 2005, and it makes it more difficult to qualify. You’ll find much more paperwork required, limitations that are tougher, plus you also will be required to attend counseling by a non-profit counseling service that has been approved by the court. Don’t look for a fast resolution either. If one of your creditors objects to the type of bankruptcy filing, or even the disposition of one asset, more paperwork by the attorney, and a separate court hearing for a judge to rule only on the creditor objection. Delays and more delays, and probably another retainer to the attorney.
So, what type of bankruptcy filing will you be doing? For individuals unable to pay their obligations, you have a choice of three (3), and it’s not done by a coin toss either. The choices are Chapter 7, Chapter 11, and Chapter 13. Interesting numbers aren’t they? In a Chapter 7 filing, which is called a straight bankruptcy, you literally surrender your assets to the court, who divides it up among your creditors, and erases your debts. There are certain assets that are exempt from being divided, such as a pre-determined amount of equity in your home, one vehicle, and certain personal and household items. To qualify for the Chapter 7 filing, there will be a means test done by the court, analyzing your current income and expenses. Generally, if the test reveals that your discretionary income on a monthly basis is below $100, you will qualify. If not, you may get bumped up to the Chapter 13, or an unsecured creditor, such as a credit card issuer, may object and have their own ideas.
There is also a new provision in the law that prohibits anyone with debt in excess of $1.2 million from a Chapter 13 bankruptcy filing, and moves them into a Chapter 11. This Chapter is normally used for business filings, and is basically a reorganization for a certain period of time.
In a Chapter 13 bankruptcy filing, the debtor (you) is generally provided a payment plan by the court, whereby you are instructed who gets how much each month. Normally the unsecured creditors (credit cards) are paid a smaller portion and then at the end of your period, usually three to five years, any balances remaining are erased. Secured creditors, such as mortgages, auto loans, are treated differently. Plus, if you owe the IRS for taxes, don’t expect any forgiveness there.
The bankruptcy laws are very complex, and all you’re seeing here, is a very limited and superficial mention of certain facts. If you are considering a bankruptcy filing, we strongly urge you to contact an experienced attorney who will explain the various nuances and also your rights and obligations under the law. Give this matter very, very, serious consideration, and make it your last and only option.
There are other options that you should take first. Contact every one of your creditors and explain your problem to them. Believe me, they hear this every day from other customers, and most will be willing to work with you. Some credit card issuers will stop the clock on the interest for you, and even give you a moratorium on principal payment for a certain period of time. Your bank or mortgage company may agree to reduce the interest rate and even restructure the payments, and possibly a moratorium as well. Same for the car payment.
The most important advice that I can give you, is to COMMUNICATE with every lender. NEVER dodge the collectors, no matter how upset they are. If you communicate with them before your situation gets really bad, that’s even better. You’ll find that most of them will be willing to talk and work with you, as long as you have a desire to repay their debt.
If you enter a bankruptcy filing proceeding, and are successful, that stays on your credit report for seven years at least. You may even qualify for future credit, but I can assure you, you will not like the interest rate or the other terms.