Considering a Bankruptcy Filing? Make This Your Absolute Last Choice
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.
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My wife and I filed for a chapter 7 bankruptcy and it has made our situation easier but also worse. We can’t get credit anywhere but then again, maybe we don’t need it since that is how we got stuck in this mess in the first place. We also had to give back one of our vehicles but luckily, our other vehicle was already paid off. Bankruptcy should be used as an absolute last resort.
The creditors will get you every time. I had a medical bill I couldn’t pay last year and it got turned over to collections. They waited until the day after we got our tax return to serve us at the front door, at which point we had to pay the debt plus court costs even though we didn’t go to court.
I agree that bankruptcy shouldn’t be easy, but I think that making people jump through so many hoops for it is ridiculous. Counseling yes, so many court costs and paperwork, no no no.
Thanks for the article! It’s really good information to have.
“Bankruptcy laws are very complex” – and also intimidating for those people who are inexperienced. However, for some people, bankruptcy is their last and only option because there are no more plausible ways to amend their debts. It is for these people that the bankruptcy laws and bankruptcy attorneys exists.
I agree that communication with your creditors is the first step you should take. Often this can result in you getting into a very much better situation, and without having to go bankrupt.
I was once in so deep my husband and I considered this. I’m glad we avoided it but, seriously, there is no shame in it for people who have to do it. The debt counseling is something anyone deep in debt should do regardless.
I would never consider it, it just ruins everything. I had a friend go through the process and I learned that you still have to pay something as part of the ruling, you don’t get away with not paying anything. Assets are taking into account, your whole life goes under the microscope – it’s not good and it’s not worth it.
I agree with Emily above. Credit counseling (whether it’s through a church or an agency like CredAbility.org) will go a long towards towards preventing debt and a potential bankruptcy. It would be wonderful if there was a bigger emphasis on personal finance in schools too.
I totally agree bankruptcy should be a last resort, but sometimes it’s the only resort.
I had to undergo chemo therapy and as it happens, I was one of those unlucky people who are debilitated by it. I dutifully explained to my creditors that I could not continue working full time and may eventually have to take sick leave so we needed to discuss payment options. Being self employed I had private insurance coverage to cover necessities, but only one credit carried it’s own payment coverage.
Falling behind was bad enough, but creditors are heartless, and it was not long before everything was in collection. It made no difference that I was ill, collections agents called day and night. I tried to set up payment plans which worked for a year or so, but once I was unable to pay because working was no longer possible the revised payments were not doable. Plus many creditors refused to sign on to the payment plan anyway.
Many people feel guilty about filing for bankruptcy, but I don’t. It was not my fault I became sick and I did everything humanly possible to work with creditors. In my mind, which may be my rationalization to my creditors, I deserved to be released of my responsibly to make good on my borrower commitments. Ironically, I’m now healthy and though I have no credit. I’m also stress free because I’m living off the grid, something I swore to myself I would do if I recovered.
There are many situations where the debtor is forced to file bankruptcy because of insensitive creditors, and other factors that are beyond their control. In cases like yours where you are physically unable to work, there really isn’t much choice.
Same thing happened to me. I went though 12 months of breast cancer treatment but luckily I was insured for 60% of my gross pay on long term disability. However, less income didn’t stretch very far and I couldn’t pay all my creditors the minimum payments. I called them and told them of my situation and they agreed to suspend accrued interest so that any payments I did make went straight to principal. This allowed me to pay 10 bucks a month to each creditor as a ‘good faith’ payment and kept me out of collections. If that fails, call your creditors and tell them you’re going to talk to a Trustee in Bankruptcy about a Consumer Proposal, but before you do that you’d like them to offer you a settlement. This scare tactic worked for me as well. I added up all the interest that I had paid over the last two years and asked them to reduce my debt by that amount- this way they could see they weren’t losing money.
I think just the word bankruptcy is intimidating – I did everything I could so not to be in this situation but I know someone who had no choice. She started with a debt management plan but but this certainly wasn’t the long term solution.
Right now she’s in an okay situation and that’s all that matters.
I agree, the word by itself, can be very intimidating, but there are cases where this is pretty much the only feasible alternative. Many have gone to counseling and other methods of guidance, but were literally hounded by collectors, who put such pressure on that the individual’s physical and mental health were affected.
Our friends had a string of bad luck and had to declare bankruptcy. It’s a tough decision, and you are right, it should be your last resort. They struggled with it but with 2 small children, they decided it was best to go that route. Now they are really good and careful with every dollar spent, but they can’t buy their home and even renting a place was difficult because a bankruptcy stays on your credit report for several years. My advice to anyone would be to think long and hard before you choose that path. I never understood the different kinds, so thanks for breaking them down.
Many people look at bankruptcy as an easy way out, but it stays with you for so long that it seems to make matters worse. I agree with you that it should only be used as a last resort.
I’ll tell you, with the amount that my morgage is underwater right now, bankruptcy is seeming like a good idea! I’m so ready to just file and walk away from it all 🙁 This article was a good read though, and gave me a lot to think about. What other options would a person like me have, other than filing just throwing in the towel?
If you haven’t met with a credit counselor yet, it might be a good idea to do so and see what your various options are for your present situation.
I heard a rumor that it is not possible to file bankruptcy on your own. Few years back I lost my job, and because of the economy, it was next to impossible to find a job to replace it. Being faced with this situation, it was not possible for me to keep up on the bills. The bankruptcy laws were created to help good people that got caught up in an unexpected circumstance, and allow them to have a second chance by removing their debt. So as the author said contact an experienced attorney regarding this.
I have quite a bit of debts (student loan, credit card loan etc.), now I just pray that I will never have to file for bankruptcy. I agree with the author completely, bankruptcy should be the last thing on your mind.
I reject going bankrupt. I never pray for such that’s why I always plan and manage my spending and I always try as much as possible to avoid debt.