Are you thinking of using bankruptcy to get out from under a financial burden that feels like it's ruining your life? Do you know what bankruptcy means to you and your family and how it can affect the assets you currently have? Here are some facts and suggestions you may use to determine if bankruptcy is the right path for you.
Bankruptcy is a financial practice in which you declare, officially, that you cannot repay your loans now nor can you see a way to repay them in the future. An individual may declare either chapter 7 or chapter 13 bankruptcies. There are certain requirements that you must meet in order to be eligible for either chapter 7 or chapter 13.
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You may file for chapter 7 bankruptcy if your debt is very high and your income is too low. In most states, you are required to complete a counseling course on bankruptcy so you can make an informed decision before you choose this option. Then you file the proper documents with a bankruptcy court. Upon filing, the court will contact all your creditors and stop any wage garnishments and legal actions against you. This action will also stop your creditors from calling you about your debt.
The next step is a meeting with all your creditors, called the 341 meeting. Your creditors have the option not to attend, but you must be there. There will be a trustee presiding. The meeting will take only a few minutes and the chances are good, none of your creditors will show up. The trustee will then determine what assets you have that may be sold to help pay your debts. Your creditors will have 90 days to file their claims. You will be assigned a bankruptcy attorney to assist you with this process. After 90 days, or when all your creditors have filed a claim and been paid a portion from the sale of your assets, all of your debts will be written off, except for some exceptions. You may not write off student loans, alimony, child support or back taxes. Depending on the state you live in, there may be other exceptions.
If you know you are going to file for bankruptcy, it is a good idea to start selling some of your assets early and, possibly get more money than if the trustee did it. This will help you settle your debt more easily. In fact, you could even get enough money to completely repay your debt and save yourself the time and trouble of filing bankruptcy at all.
On the other hand, if you have too much debt but are earning a decent income, you may file for chapter 13 bankruptcy. Chapter 13 is more of a reorganization of finances than a way to write your debt off. To do this you must fulfill certain obligations.
When you file for chapter 13, you will develop and file a plan of debt repayment with the courts. The plan must outline how you are going to attempt to pay off your debtors over a period of three to five years. You will need to commit a large amount of your future income for the next three to five years to paying off your creditors. Your creditors will not get all of the money you owe, but, when you're done, the debt will be gone. During this time, your creditors cannot attempt to get paid except through bankruptcy court.
If you have a job and are earning a good income, this type of bankruptcy allows you to keep your property. If you have a home that is being foreclosed, you can stop the foreclosure, and have your mortgage reinstated when you have completed the plan.
The downside to chapter 13 is it will remain on your record for at least 10 years, which may affect your ability to get credit. You will also not be able to apply for credit during the three to five years you are paying back your debt.
Bankruptcy is a very big step and should be considered a last resort. Explore other ways to get out of debt. You might consider a debt counseling or negotiating with your lenders. You might even consider asking family or close friends for a loan, although this option could prove more troublesome than bankruptcy.
Debt counseling is for anyone with a lot of different bills. A debt counselor will negotiate with your creditors to either reduce the amount of your debt or lower your interest rate. Then the counselor will take all of your bills and consolidate them into one low payment and distribute the money to each creditor. However, other fees and interest rates can be high.
Using this method, it should only take two or three years to pay them off, provided you do not incur any further debt. If you think it will take more than five years to pay these debts back, this may not be the right option for you. Debt counseling and consolidation can increase your credit score. Paying just one payment a month can mean that some bills are being paid before they are due and credit companies will reward you for paying early or on time. This can be a viable alternative to bankruptcy.
Another alternative is to negotiate directly with your creditors. As soon as you realize that it is becoming more difficult to make all your payments each month, contact each of the companies separately and see if you can lower your payments or interest rate. Most credit card and other loan companies are willing to negotiate with you. It doesn't hurt to ask what options are available. Your creditors want to get paid, and if you file for bankruptcy, they won't get all of the money they are owed. When you contact them and explain your situation, you are showing a willingness to repay your debt. If you ask for help, they might be more willing to help you find a way to get the debt taken care of. This will get you back on track. This alternative is worth considering before bankruptcy.
Of course the best way to avoid bankruptcy is to nip it in the bud. Collect all your credit card bills and loan payment books together in one place. Add up all the minimum payments and compare that balance to what you bring home each month. If the payments add up to more than your income, it's time to start making changes in your spending habits before the problem becomes unmanageable. Sometimes these changes can be very simple. If you are in the habit of grabbing a coffee at Starbucks each day, just making your own can save you quite a bit each month. Look for other ways to curtail your spending, take your lunch to work, only eat dinner out twice a week, instead of three or four. You will find that just making these simple changes can bring your debt problem under control, before it becomes a real problem requiring bankruptcy.
Be careful with credit cards and loans. Credit card companies, banks and loan companies make it really easy to get credit these days. Not to mention department stores, which often offer low interest rates or special pricing if you sign up for their credit card. It seems like everyone has their own credit card and everybody is "PreApproved". These types of offers inundate your mailbox and it is really easy to get buried in debt without even realizing it. The best thing to do is shred every piece of junk mail with your name on it as soon as you get it. Identity theft is also something that could lead to bankruptcy.
Make all your payments on time or early, pay more than the minimum payment whenever possible. Try to avoid impulse buying. Unless it's something you really need right now, sleep on it before you buy, especially if you are going to have to make payments on it. You can put off the purchase and set aside some money every payday until you have enough to pay for it. This way, you make the payments on your terms, instead of the credit company's. Saving up for something you really want makes it more valuable to you, and it won't put you in debt.
Bankruptcy is sometimes the only way to get out of debt and turn your life around and it works for many people. If you are at the point you need to take this step, don't wait too long. The sooner you put the solution into motion, the sooner you will be out from under it. But, if you are just starting to get into trouble, start to take precautions now, before it's too late.
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