Let’s say the economic recession has hit you hard and you are already in big trouble with your financial situation – the bills just keep piling up and you have maxed out your credit cards. You are headed for rock bottom because of your financial woes … maybe it is time to file for bankruptcy.
Nowadays, more and more people are declaring bankruptcy for reasons like: marital issues, medical expenses and over used credit that results to massive debts. So, if you are no longer able to cope up with your debt and don’t want to tie a rope (attached to a concrete block) around your neck and throw yourself into the river … it is best to know the options you can take when filing for bankruptcy.
Do I file for Chapter 7 or Chapter 13?
There are two types of bankruptcy that are mainly utilized for credit card debt: Chapter 7 and Chapter 13.
- Chapter 7
When you file for Chapter 7, your assets will be turned over to a trustee who will be tasked to liquidate your assets to pay off your debtors. Assets that are liquidated are usually in the form of non-exempt property. Non-exempt property can be:
– A second house or vacation home
– Collection of valuable things (coins, stamps, Oscar trophies, jewelry, artworks …etc.)
– Money, bonds, bank accounts, stocks and other forms of investment
– A second vehicle
(Don’t worry, they will not seize your toothbrush)
It is advisable to file for Chapter 7 bankruptcy if you want to get over your debts on a shorter time frame. For Chapter 7 filings, debts that can discharged are usually dismissed within 4 months giving you a chance “to start anew” much quicker because this wipes out all your debt.
Word of advice, you have to undergo a “means test” in order to file for Chapter 7. Your income has to show that you are earning below the state’s average salary standard for the past 6 months.
- Chapter 13
Okay, you do not want to lose your assets but you are already drowning in debt. You can take the other option which is filing for Chapter 13. Chapter 13 is where your debt is restructured. This process is advisable for people who have a steady income and that their income can support their regular expenses and still have enough money to slowly pay off their debts. For Chapter 13 filings, the debt is paid off within 3 to 5 years and the courts will assign you a payment plan that has to be fulfilled within that period. Any remaining debts you have left after paying off within the said period and completing the payment plan will be written off by your creditors as a loss to their side.
Credit counseling or file for bankruptcy ?
Many people believe that it is better to get into credit counseling or debt management program instead of plunging into bankruptcy right away. Well, it is just like delaying the inevitable with much more painful consequences. To name a few:
- Creditors can continually harass you (threatening phone calls, lawsuits, etc.) and embarrass you (receive threatening phone calls regardless of the time of day or everybody hearing that you owe this much and you should pay up …etc.). Whereas, if you file for bankruptcy, creditors are forbidden by law to continue harassing you and file any lawsuits.
- Credit counseling or debt management may get you into further debt. It has been noted that there are agencies who really do not help you get over your debt, these agencies may say, “Hey, we will reduce your debt and you just have to pay this much.” But on top of that they will charge you their fees which will sink you into bigger debt.
For these matters if you are considering bankruptcy, it helps to get a good lawyer who could advise you on the best possible options to take.
Points to ponder:
- If you are going to file for bankruptcy, it is required that you list all your creditors (even cards that do not carry any balance)
– If you have a credit card that has a low balance and you are about to file for bankruptcy, it is advisable to pay it off before filing. That way you have a chance to keep the card even if you file for bankruptcy. Disclaimer: By doing this, it does not guarantee that your card will not be cancelled by the creditor if you file for bankruptcy, it still depends. But rarely will the credit company cancel your card if you do not owe them anything.
- Your spouse or domestic partner will not be affected by the bankruptcy if they are not responsible for the debt and did not sign or enter into any contract or agreement for that debt. But, if you live in California, Wisconsin, Idaho, Arizona, Nevada, Louisiana, New Mexico, Washington, and Texas – then that is a totally different issue because these are “community property” states. Community property states follow the concept of “for better or for worse” which means couples will have a 50/50 split on everything (assets and debts). The Thomas Hogan Law Office can give you very good advice about this.
- If your debt is due to Fraud (identity theft), you are not responsible for this but will still need to go to court to prove your innocence.
- A record of your bankruptcy stays on your credit report for 10 years so don’t start calling your credit card company and complain about it just because you already got discharged. It will only get you frustrated because credit card companies can only do so much and you’ll just spend hours going back and forth between the credit card company and the credit reporting bureaus.
- There are some debts you can never get away from, like:
– Alimony, spousal support, child support
– Settlements as a result of DUI that resulted in personal injury and/or death (Don’t be stupid: Don’t drink and drive!)
– Income Tax (Unfortunately, a necessary evil)
– Student Loans
Note: Sen. Dick Durbin proposed a Bill on June 7, 2007 that aims to have private student loans be included in the list of dischargeable debts like it was before 2005. But so far, dischargeable student loans are rare cases, they can be discharged if:
- It will cause so much undue hardship on your part (don’t forget this needs to be proven in court)
- Death or permanent disability
- You were unable to finish your education/program because the school had shut down.
Money is tight for everyone these days but always remember that your debt is your responsibility. If you don’t want to be put in a predicament and forced into bankruptcy, avoid unnecessary expenses like borrowing money from your credit card company just to get Botox injections or your nose done. Be responsible with your credit and expenses.