 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 condition is often not that simple.
And changes to the law effective October 17, 2005 has made the decision
even more significant.
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 vital
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 condition 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 bankruptcy currently, it could still do things to your
confidence in making important financial decisions.
One of the positive aspects of filing bankruptcy
is that most bankruptcy cases are granted. So it is immediate 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 to avoid 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. Since 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
generally involve large sums of money - in general 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 choice would be to try to renegotiate
these loans with the creditors. That is, if your debt has not totally
caught up with you and ruined your credit already. Or you could take
the loan elsewhere.
Let's say, for example, 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 method for you to deal with this
instead of instantly filing bankruptcy. Debt consolidation can provide
some instant 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 considerably increase your ability to pay.
For example, 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. Additionally 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 options work for you,
then you are down to no other option but to file 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:
- Recent taxes
- Trust fund taxes
- Child or family support
- Criminal fine or restitution
- Accident claims involving intoxication
- Unscheduled debts
- Penalties payable to the government other than tax penalties
- Student loans
- Debts listed in prior bankruptcy where debtor was denied a discharge
Non-dischargeable debts under chapter 13:
- Debts for alimony, support, and maintenance
- Debts for death or personal injury related to drunk driving
- Debts for criminal fines and restitution
- Most debts for student loans
- Debts not covered by the plan
- Installment debts maturing after the close of the plan
It is significant 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 choice you have is to file for a Chapter 13 discharge.
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