Should You File for Bankruptcy?
Most people who are confronted with
this tough decision vacillate between “fighting” to “fleeing.” Do
you want to struggle to pay the debts? Or do you get relief from the
constant pressure and start over.
Well, if you put it that way, it does
not look all that bleak. Unfortunately, the situation is often not
that simple. And changes to the law effective October 17, 2005 has
made the decision even more important.
Whether or not you should file for
bankruptcy is a personal decision on your part. The factors are far
too numerous and the overall impact of bankruptcy on your future
finance far too important to treat a decision such as this lightly.
Before you decide, here are the
things that you need to know:
-
What are your alternatives to
bankruptcy?
-
Which chapter of the Bankruptcy
Code should you file under?
-
What debts will be discharged in
bankruptcy?
Weigh Your Options
Some people make the mistake of
treating bankruptcy as the be-all and end-all of everything. They
think that once you get to that point where your debts far outweigh
your assets and the chances of paying them off is not likely to
happen anytime soon, the situation is ripe to file for bankruptcy.
Stop right there.
Bankruptcy is not the only way. It is
not the only solution. What you believe is an unsolvable problem may
turn out to be quite solvable, if you only take the time to weigh
your options well.
Always keep in mind that filing for
bankruptcy has the possibility to be devastating both economically
and emotionally. While there is less public stigma attached to the
act for filing for bankruptcy these days, it could still do things
to your confidence in making important financial decisions.
One of the positive aspects of filing
for bankruptcy is that most bankruptcy cases are granted. So it is
instant relief from debts versus toiling for years to pay off your
debts. However, contrary to popular belief, bankruptcy is not an
easy way out of a sticky situation.
Whether you are filing under Chapter
7 or Chapter 13, the end result is almost always the same –
extensive damage to your credit and long-term economic issues. Now,
you know, of course, what this means. These credit issues brought on
by bankruptcy would cause many problems in the years to come.
So what, then, are your options
besides bankruptcy?
That, my friend, is the question.
Renegotiate Secured Loans
First of all, what is a secured loan?
How is it different from all other loan types out there? Is it any
different from a credit card debt?
The answer to the third question is:
It is very different. In fact, a secured loan could not be
any farther from a credit card debt.
Simply put, a secured loan is one
where you are made to mortgage your property so that the lender can
forcibly sell it to get its money back if you can’t repay.
Now, if you think that once you file
for bankruptcy, you can escape all your debts and start with a clean
slate (so to speak), well think again. Because not all debts can be
discharged with bankruptcy. And one such debt is a secured loan.
Now, the thing with secured loans is
that they usually involve large sums of money – generally the
largest most people have. Your car and/or your house are secured
loans. So even if you file for bankruptcy, these debts will neither
lessen nor disappear.
A better option would be to try to
renegotiate these loans with the creditors. That is, if your debt
has not completely caught up with you and ruined your credit
already. Or you could take the loan elsewhere.
Let’s say, for instance, that you
have a home loan that is several years old. You can try to
renegotiate for a lower interest rate on this. And depending on your
principal balance and current terms, there is every chance that you
can see your payment go down by several hundred dollars per month.
That is money in your pocket which you can use to pay off other
debts.
If your home loan has only a few more
years left, you can also try to lengthen the period or ask for an
extension so you can reduce your payments even more.
Debt Consolidation
If you are like most people, then you
probably have multiple payments that you must make every month. From
high interest credit card bills to car loans, house mortgage to
doctor or hospital bills – all these can add up, forcing you to deal
with serious money issues every month.
There is a way for you to deal with
this instead of immediately filing for bankruptcy. Debt
consolidation can provide some immediate relief from you high
interest loans and debts. But be sure to run the numbers first.
There isn’t much sense in consolidating debts if it cannot
significantly increase your ability to pay.
For instance, you have a car loan
that runs for 15 years. By computing your monthly payments and
interest rates, you come up with $40,000, which is the total
payments, including interest, you would have to make for the car
loan. In addition to the car loan, you also pay $15,000 for items on
a credit card if you pay the minimum for 30 years.
If you take a debt consolidation loan
as a second mortgage, you can use the money to pay off other debts.
In most cases, this could significantly reduce your monthly payments
and even stave off bankruptcy proceedings.
There are, of course, several more
options available that you can take to avoid bankruptcy. But the
ones above are the easiest routes to take and the most convenient,
not to mention most effective.
If you want, you can also ask for a
professional’s help such as a debt reduction attorney or
professional debt negotiation companies that can take your case to
the creditors. There are also some communities that have volunteer
organizations that can do some of the negotiation for you.
There are always other alternatives,
if you keep your eyes open and leave bankruptcy as a last resort.
Chapter 7 vs. Chapter 13
If none of the above-given
alternatives work for you, then you are down to no other option but
to file for bankruptcy. The relevant law to consider is the
Bankruptcy Code, which defines and outlines the procedures involved
in filing for bankruptcy under each chapter.
The two most common types of
bankruptcy in the United States are Chapter 7 and Chapter 13. The
first is available only to individual consumers while the latter is
available to both individual debtors and business organizations. The
first involves a liquidation of all nonexempt assets and properties,
while the latter allows you to keep your properties in exchange for
signing up for a repayment plan.
Dischargeability of Debts
If there is one thing you should take
note of bankruptcy, it is that not all debts can be discharged. Keep
this always in mind. Because you might think that you can get away
with your debts scot-free after filing for bankruptcy only to find
out later on that you are still obliged to pay for some certain
non-dischargeable debts.
NON-DISCHARGEABLE DEBTS UNDER
CHAPTER 7:
Ø
Recent taxes
Ø
Trust fund taxes
Ø
Child or family support
Ø
Criminal fine or restitution
Ø
Accident claims involving intoxication
Ø
Unscheduled debts
Ø
Penalties payable to the government
other than tax penalties
Ø
Student loans
Ø
Debts listed in prior bankruptcy where
debtor was denied a discharge
NON-DISCHARGEABLE DEBTS UNDER
CHAPTER 13:
Ø
Debts for alimony, support, and
maintenance
Ø
Debts for death or personal injury
related to drunk driving
Ø
Debts for criminal fines and
restitution
Ø
Most debts for student loans
Ø
Debts not covered by the plan
Ø
Installment debts maturing after the
close of the plan
It is important to know what debts
are dischargeable and what debts are non-dischargeable under any of
these two bankruptcy types.
If you have substantial debts that
are dischargeable under Chapter 13 but non-dischargeable under
Chapter 7, then a Chapter 13 bankruptcy might be preferable to
Chapter 7.
A sub-factor to consider in this is
your eligibility for a discharge. The law states that a person who
has received a Chapter 7 discharge in a case that was filed within
six years is not eligible for a Chapter 7 discharge. In that case,
the only other option you have is to file for a Chapter 13
discharge.
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