Should I File For Bankruptcy?

With consumer debt at reaching a record high, many more consumers are filing for bankruptcy. Even the affluent can now experience financial troubles especially when a layoff, divorce, disability, or a death in the family occurs. If you're considering filing for bankruptcy, there are some things you should know about your options such as what bankruptcy is, what the consequences are, and some of the traps you can possibly fall into when you use bankruptcy to get out of debt.

As soon as you realize you're over your head in debt, try contacting your creditors immediately. Explain your situation. They may be willing to work out a modified payment plan for you to pay what you owe them. Or you may consider contacting a nonprofit credit counseling service that will work with you and your creditors to develop a debt repayment plan. Such plans require you to deposit money each month with the counseling service and they pay your creditors. Their services for you are confidential. You can contact one such service, Consumer Credit Counseling Services, in business since 1974, by writing to the National Foundation for Consumer Credit, Inc., 8611 Second Avenue, Silver Spring, MD, 20910, or calling them at (800) 388-CCCS to request the location of a local office.

A second mortgage or home equity line of credit is another possibility, but think carefully before taking either of these on. While these loans may allow you to consolidate your debt, they also require you to put your home up as collateral. If you miss a payment, you could lose your home. If you're having trouble meeting the mortgage payments, contact your mortgage lender and explain your circumstances. You may be able to make partial payments or have your loan rewritten. You may be able to borrow from your retirement fund if you have one through your employer. Repayment must take place within five years, but may be made through payroll deduction. (All the money is repayable, though, even if you lose your job for any reason. If you don't pay it back, the outstanding balance may be subject to taxes and penalty.) You might want to borrow from life insurance. Of course, if you don't repay what you borrow during your lifetime, the loan balance will reduce the life insurance proceeds upon your death. If you sell securities, sell depreciated securities first. Stop funding retirement plans, including 401(k)s, to keep assets liquid.

There are two ways to file bankruptcy. Under Chapter 7, you will file a bankruptcy petition that lists your assets and your liabilities. Your assets, except for certain ones that are exempt, will be collected and sold, and the proceeds distributed to your creditors. Except for certain nonexempt debts, whatever obligations remain will be written off, and you'll start with an almost clean slate. The debts that are nonexempt and that won't be forgiven are amounts you owe for alimony, child support, most state and federal taxes owed in the three years before you filed, some federal student loans, and any debts you did not list on your petition unless the creditor filed a claim. A bankruptcy attorney will explain this to you.

Under Chapter 13, you work out a plan to repay your debts within three years (in some cases you may have five years). Sometimes the repayment plan may provide for paying less than the full amount you owe. At the time you file your Chapter 13 petition, the court issues an order restraining collection efforts, lawsuits, repossession, foreclosures, and, in some cases even the accrual of interest and late charges. If your repayment plan is approved, you make payments to a trustee, who distributes these payments to your creditors. Should you become unable to make payments because, for example, you become ill or lose your job, you may be allowed additional time. However, if you should incur any further debt while you are on the plan, the court can end the plan. Although you will be able to retain your assets under Chapter 13, you will have to pay a trustee's fee of about 10 percent of what you are repaying. It's advisable to work with a bankruptcy attorney in either kind of bankruptcy, but especially Chapter 13. This, of course, will require your paying attorney fees.

Not only does a bankruptcy remain on your credit record for 10 years, you may find that you can obtain credit only at high interest rates or by putting up a large amount of collateral. In a Chapter 7 filing, any assets you have in an IRA will have to be liquidated, incurring taxes on the earnings and possibly a penalty. And, in the Chapter 7 process, you will also undoubtedly have to give up possessions that are important to you and your family and change your style of living. Some employers won't hire you if you've gone bankrupt. Credit card issuers are lobbying to toughen bankruptcy laws to require most bankruptcy petitioners to seek protection under Chapter 13 and thus repay at least some of their debt. Talk to a bankruptcy attorney if you are uncertain as to which way to go.

Beware of ads that offer quick fixes. Some ads claim: "Consolidate your bills into one monthly payment without borrowing"; "STOP credit harassment, foreclosures, repossessions, tax levies and garnishments. Keep your property." "Wipe out your debts! Consolidate your bills! How? By using the protection and assistance provided by federal law. For once, let the law work for you!" Debt relief ads often fail to mention that the relief they're promoting is bankruptcy, and you may not realize this until you’ve paid something for the company’s services. By enlisting the help of some unscrupulous businesses known as "petition mills" that promote their services as those of "financial counselors," "eviction defense agencies" or "renters service agencies," people in desperate financial straits can end up in bankruptcy court without even realizing that's where they're headed. They're told not to worry, "Leave it to us," and "We'll take care of it," without being told just how that will happen. It is better to ask advice from a good bankruptcy lawyer first.

Once your bankruptcy has been discharged, you should contact credit reporting agencies and get a copies of your credit report. If negative credit (other than your bankruptcy itself) remains in relation to a debt you paid off, ask the creditor to report that you paid it. If they won't, write a letter to the credit bureau, explaining your particular circumstances, and ask them to include it in your credit report. When applying for credit again, be open about your past problems. Although you may have to pay a higher rate of interest or provide a cosigner or collateral, you should eventually have a clear credit record