(This is a guest article by Dorothy Anderson*)
Recession has affected a lot of us in disastrous ways. Businesses big and small have gone bankrupt all around the world. Being in debt itself creates a lot of pressure on human minds. To top it, if you are in knee deep debt, you may feel perplexed about the various options available for the repayment of your debt. Many people do not give this problem much of a thought. Instead, they file for bankruptcy, thinking it to be the easiest and safest way out of debt. However, bankruptcy is not a viable option. It should rather be the last resort that you choose.
Bankruptcy is lawful declaration of incapability of an individual to pay his creditors at a given time interval. In case of a personal bankruptcy, you need to surrender your non-exempt property to a court appointed trustee, who liquidates the property and distributes the money to your creditors.
Basically, there are six types of bankruptcy in total; however, the two key ones are as follows:
- Straight bankruptcy or chapter 7 bankruptcy- In this type of bankruptcy, you can have all your debt cleared, after your assets are liquefied and used to repay your debts. Just remember, that you should not conceal any records related to your present financial condition. You will not be granted any discharge, in case you do so. Relief, in such cases of bankruptcy is available only once in every eight year period.
- In case you wish to enroll yourself to a wage earner’s plan, also known as reorganization bankruptcy or chapter 13 bankruptcy, this can clear you most of your debt. Once you file for the petition of the plan, you are protected from lawsuits and all other legal actions that creditors could have taken against you. The plan allows you to pay off your debt from your future earnings, while you are under the protection of the court. Your debt is paid according to a debt management plan set up in cooperation with your lawyer. You pay a fixed amount of money each day to a court appointed trustee. The trustee then distributes it to your creditors. The repayment plan is usually of three to five years. The creditors may object to the payment amounts, however, the judge has the final say.
In case, you have a secured debt, like a car loan, that you want to continue paying, then, reorganization bankruptcy is a better option as, chapter 7 bankruptcy requires you to liquefy assets.
According to the US Bankruptcy code, if you have more than $922975 in secured debt and $307675 in unsecured debt, you are not eligible to file reorganization bankruptcy.
In both the above cases of bankruptcy, you need to receive credit counseling from an approved firm, before filing the petition. Personal bankruptcy laws are complex to deal with. Therefore, make sure that you seek advice from an attorney before filing the petition.
So, what are the ways that you can choose to avoid bankruptcy altogether?
Check out the below-mentioned alternatives that you can choose from:
- Debt consolidation program - This kind of programs help you to make your monthly bill payments at reduced interest rates. Here, you can consolidate all your debt into one easy monthly payment. Moreover, late fees and all other charges are eliminated. This also has a positive effect on your credit ratings. However, there are various effects of consolidating debt.
- Debt settlement - When you cannot manage even minimum payments on your debt, debt settlement can be an option for you. In this kind of program, the creditors reduce your debt amounts by 40-60%. All you need to do is, negotiate with the creditors. You can obtain help from professional debt settlement firms.
- Debt management - If you choose to opt for debt management, you need to visit a credit counseling agency. They will offer you a plan to repay your loans. They would help you to get reduced rates of interest on your debt. Furthermore, any interest charges incurred due to late payments would also be waived off.
Also, before filing for bankruptcy, check out the cons of filing for a bankruptcy petition:
- Filing for bankruptcy will ruin your credit listing - A declaration of bankruptcy will remain on your credit score from six to ten years. This will make it difficult for you to get new loan approvals. Hence, it is always better to pay off your debt rather than go for bankruptcy filing.
- You may be rendered homeless - Unless, you qualify for state or federal exemptions, and you may lose your car / home. This is because, if you are filing for a chapter 7 bankruptcy, your assets are sold off to repay your dues.
- You cannot get rid of all your debt - Filing for bankruptcy will not get you exempted from all your debt. There are taxes, student loans etc which you have to pay.
- Bankruptcy may influence your security clearance status, thereby affecting your financial situation.
- Not all retirement plans are protected - According to the bankruptcy laws, 401k retirement plans are protected. However, any amount above $1 million is used to pay off your debt.
So, before considering bankruptcy, see whether, it is right for you. Think about the below mentioned points:
- Try negotiating with your creditors - Creditors are human too. They would rather settle a debt instead of having it discharged in bankruptcy.
- Get yourself credit counselor - Credit counselors can help you bargain at lower interest rates and monthly payments. Explore the option as an alternative to bankruptcy, since under the bankruptcy law, you will have to get credit counseling advice, before filing for bankruptcy.
- According to the American Banking Institute, if your creditors have garnished your wages, filing for bankruptcy will stop it.
- Your medical bills too, can be discharged completely, if you file for bankruptcy.
- Everyone deserves legal help. Contact a consumer law attorney to discuss about your bankruptcy options. Only, he will be able to review the facts and give you the correct advice.
Ultimately, you can work your way out of bankruptcy, only by changing your spending habits.
*About the author: This is a guest post by Dorothy Anderson. She offers advice to consolidate debts. Dealing with debts is all about choosing the right option.
*Image Credit: Photograph by blehk [via Flickr Creative Commons]