Consumers who are struggling under a heavy burden of debt may view bankruptcy as an attractive solution. In some cases, filing for bankruptcy may be necessary but it should be the last option considered.
There are two types of debt – secured and unsecured. Secured debt is money owed on your car, your home and on furniture. The item you purchased acts as security for the amount you owe and should you not pay the debt, the lender can repossess the property used as security.
Chapter 7 bankruptcy was designed to provide a safety net for people who found themselves deeply in debt with no ability to pay
If most of your debt is from credit cards, it is tempting to file Chapter 7 bankruptcy and erase that debt completely.
The Pros and Cons of Filing for Bankruptcy
Bankruptcy does not carry the social stigma of years past. It is a legal way to reduce your debt to allow you a chance to regain your financial footing.
There are some consumers who file for bankruptcy several times during their adult life but for most of us, bankruptcy is only considered when all other options to pay our debt have failed.
Although you can totally eliminate your credit card debt through a Chapter 7 bankruptcy, you will also damage your credit for ten years into the future. That is how long the bankruptcy remains on your credit report.
You will not have to wait ten years to use credit again but will be charged higher interest rates and will find it difficult to qualify for credit cards or for any loans or mortgages.
Alternatives to Bankruptcy
There are steps you can take to solve debt problems that will avoid bankruptcy. If you are unable to pay off your credit cards but have some funds on hand, you may be able to negotiate with lenders to pay off a smaller amount.
If the lender agrees to a settlement you must be able to pay the settlement amount either immediately or over 2-3 months or the full amount of the debt will be reinstated.
In exchange, the lender will mark the account as settled and paid and the account will be closed. This will have a detrimental effect on your credit rating but can be overcome by paying other debts such as for your car or mortgage in a timely way.
Within two or three years the timely payment will balance the black marks caused by settlement agreements and your credit score will begin to rise.
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Management Service
You may also use a credit management service to reduce the payments on your credit cards to levels you can manage.
You will be asked to provide full financial information including your verifiable income and all bill and expenses paid each month.
The management service will negotiate with lenders on your behalf and proposed lower payment which may also result in lower interest rates.
Most of the credit management services charge an initial fee for negotiation and a monthly fee for management.
Each month you would send one total payment to the management service and they, in turn, would pay each of your debts due that month at the reduced payment level.
When to File for Bankruptcy?
An ongoing medical emergency can drain your finances while ill health can prevent you from earning a living as you did previously.
Job loss is currently a big problem in the U.S. where millions of people unexpectedly found themselves without the income from a job they had worked for years.
When months pass with no income or when work hours have been cut and income is much less than it was a few months ago, you may find it impossible to pay even the minimum payments due on credit card debt.
This is not a problem you can ignore. Lenders are not as willing to “write off” debt as they were a few years ago due to the high number of consumers who currently are unable to pay even minimum payments.
If you have not been able to reach a settlement that you can pay or cannot provide even the minimal payments due through debt negotiation, bankruptcy may be the right option for you.
You can file Chapter 7 bankruptcy and exempt your car loan and your mortgage from the filing.
To do this, you must be able to show income sufficient to make the car payments and to cover the mortgage each month and the lenders for those loans will need to re-affirm the debt.
Conclusion
Bankruptcy should be the last option you consider when you are buried in debt. If the credit debt was cause by reckless overspending, it’s important to get your personal finances in order before considering bankruptcy.
If the debt was due to job loss, reduced income or medical costs, the peace of mind of seeing those debts disappear may be worth the years of living with a damaged credit report.
Filing for bankruptcy is a legal option that is open to you and can provide relief from creditors though it will be something you will have to live with for some time.
