The Bankruptcy Option

What is Consumer Bankruptcy?

There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7, also referred to as a liquidation bankruptcy, erases all debts that are legally capable of discharge. Chapter 13 bankruptcy reorganizes debt into a repayment plan over a period of three to five years.

In order to qualify for Chapter 7, the filer’s income must fall below the median income of their state. If the filer’s income is over their state’s median, then they must take a “means test” to establish their eligibility. The means test assesses the filer’s ability to pay back their creditors by looking at debt and income over the previous six months. If there is any income remaining each month to pay creditors, they will fail the means test and have to file Chapter 13.

In a Chapter 7, any assets you have over an allowed value will be sold (liquidated) to at least partially satisfy creditors, and the rest of your qualifying debt will be forgiven. The process takes from four to six months, and you will be required to complete a credit counseling program with a government-approved agency. You Will not qualify for a Chapter 7 bankruptcy if you have filed another bankruptcy within the past six to eight years.

With Chapter 13 filings, instead of selling your assets to pay creditors, you get to keep those assets, but agree to pay some or all of what you owe to your creditors over a three to five year period. You will be required to enter credit counseling from an approved agency. Then you’ll start making payments. Priority debts, like back child support and tax obligations, must be paid off in full and are not included in the restructuring plan. Then you will be required to make normal payment o4 debts, like home loans and auto loans once you reaffirm 4 the debt. Money left over will go towards repaying unsecured debt like credit cards. When the repayment period is over, any remaining balance you owe on unsecured debts will be eliminated.

Bankruptcy can:

•        Eliminate credit card debt, personal loans, and unsecured debt. Filing bankruptcy wipes out unsecured debt, since no collateral was pledged.

•        End harassment from creditors and collection agencies. Not only will you end phone calls and letters, but you might also stave off repossession or foreclosure.

Bankruptcy cannot:

•        Prevent repossession. Bankruptcy eliminates unsecured debts, but does not remove secured loans. If you secure a loan with property, bankruptcy eliminates the loan but may still allow the lender to repossess the property securing the loan.

•        Wipe out child support and alimony. Even if you file for Chapter 7, these debts are considered priority debts and must be paid.

•        Eliminate outstanding student loans. While it is possible you can show that repaying a student loan causes “undue hardship,” proving undue hardship is incredibly difficult.

•        Wipe out tax debt.5

•        Wipe out judgments, fines, penalties, or traffic tickets.

Perhaps the largest disadvantage to bankruptcy is its impact on your credit rating. Chapter 7 stays on your credit report for 10 years, Chapter 13 for 7 years. A bankruptcy can make it nearly impossible to get a mortgage for up to five years. It will make it harder to buy a car, get life insurance, qualify for other forms of credit, and sometimes even to land a job. A bankruptcy is the single worst thing you can have on your credit report. Finally, even the simplest of bankruptcies will cost you around $2,000. If you had that kind of money lying around, I bet you would still be making your minimum payments.

Here’s the bottom line: if you qualify for Chapter 7, it is a viable debt relief option despite its damage to your credit report. If you only qualify for Chapter 13, I recommend looking into other options such as debt settlement or this program. By including all of your debts in a Chapter 13, you are giving up your rights to dispute any of that debt down the road, which–as you will learn shortly, can be a powerful debt relief strategy.

So, let’s review the pros and cons of bankruptcy.

Pro: Collection activities stop. The bankruptcy court will issue an automatic stay halting collection activities and any pending lawsuits.

Pro: If you qualify for Chapter 7 you can get rid of most of your debts and get on with your life in a matter of months.

Pro: Chapter 13 allows you to keep your assets and potentially eliminate unsecured debt.

Con: Bankruptcy is a nuclear bomb to your credit score and credit report. The “fallout” sticks around for 7 — 10 years and makes borrowing much more costly.

Con: Chapter 13 is the least favorable and most common form of bankruptcy filing. You’ll pay back a good portion of what you owe and still have “bombed” credit to boot. This is an expensive proposition in the short and long-term.

Con: You affirm your debt obligations in Chapter 13, making it more difficult to employ other debt relief tactics down the road.

To find out how to avoid bankruptcy and see if our debt relief program might be right for you please contact us.

What is the Cost of Bankruptcy

Bankruptcy may seem like the only way out of some situations, but you should consider what it will cost you. Sometimes, these costs will lead you to look for another solution.

You will need to consider more than just the costs for filing the bankruptcy. You will pay the filing fees and most likely need a lawyer. These filing fees have gone up as part of the Deficit Reduction Act. The filing fees were $200 for a Chapter 7 and $185 for a Chapter 13 filing, and have now gone up to $299 and $273 respectively.

If you make changes to your case or proposals for added actions, you will pay more. And you will have to avoid missing records and writing bad checks to keep from adding to the bill.

In general, just filing for bankruptcy can cost you in nine ways:

  1. Attorney fees
  1. Credit counseling
  1. Petition fees
  1. Amendment fees
  1. Reopening fees
  1. Conversion from a Chapter 7 to a Chapter 13
  1. Splitting fees
  1. Abandonment of property costs
  1. Withdrawing the reference fees

But you will pay much more than just for those items. For the next decade you will pay higher interest rates on any loans you are able to secure. If you want to buy a home, you will probably have to shop the subprime market, which automatically means higher interest rates.

You will also pay higher insurance premiums as insurance companies look to your credit history for the potential of claims by you. The worse your credit, the more likely you are to have a claim and the higher your premiums.

You may have to sell your existing home, cars and belongings to settle your debts. You may find that even after your debt obligations are fulfilled and your credit history is on the way to repair, you will still be unable to secure credit from your previous lenders. They keep the information on file for ten years from the time the bankruptcy is discharged, not from when it is filed.

Bankruptcy isn’t something to be taken lightly. It will cost you a lot of money and lost sleep. If you are able to find a way to avoid it, you should. Under the new law, you will have to attend credit counseling to be able to file for bankruptcy. You will have to pay for this, usually $50 a session.

You are not required to have an attorney represent you, but the paperwork can be overwhelming if you are not familiar with all the legal terms and requirements. There can be a broad range of fees for attorney services, but you can expect to spend at least $500 for competent legal counsel.

Generally, the total fees for the filing itself, credit counseling, and attorney fees can run anywhere from $700 to $2,000. If you shop around, you should be able to cover all the costs for about $1,000.

But of course just paying the costs does not get you out of debt – not by a long shot. If you are forced into a Chapter 13 filing, you will also have to pay your creditors back for somewhere between 40 and 60 cents on the dollar typically, plus Trustee fees.

Bankruptcy is something that is hard to recover from, both emotionally and financially. So look at bankruptcy not as a way to start over, but a long pause in your life. Everything will change. You should try to avoid it. The total Cost of bankruptcy is just too much to be a temporary fix for your problems.

 

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