Debt Relief Options: Bankruptcy

Traditionally, if you’re not able to make minimum payments,  you’re in a hardship, or you just find yourself in too much debt, what you do is  file bankruptcy.

You file bankruptcy and you pay zero. The creditors get nothing and it’s the ultimate move, the ultimate trump card that you’ve got as a citizen. Unfortunately, about a year-and-a-half ago Congress passed new laws, which made it  extremely difficult to file for what’s called Chapter 7 bankruptcy.

Let’s talk about the difference real quick.

There are two types of bankruptcy for personal bankruptcy filing. I’m not a bankruptcy attorney, I’m not an attorney at all, so this is purely educational information. This is not any kind of legal advice. (If you want to talk to a bankruptcy attorney, I do have a close network of bankruptcy attorneys nationwide. I would be more than happy to refer you to somebody in your state/area. Just contact me, and I’ll get you in touch with them. They can answer any specific questions.)

As a basic overview, Chapter 7 bankruptcy is called liquidation, where they wipe out the debt completely.  Chapter 7 is the type of bankruptcy  these new laws affected and they have made it much more difficult to qualify. Chapter 13 bankruptcies, on the other hand, are called a repayment plan. This is where you pay back a portion of the debt, usually over about 60 months. During that time, you are making court-ordered payments and you have to go before the judge.

Let me break it down for you this way:  Chapter 7 bankruptcies are a pretty good deal, if you need to do it, it’s a good way to go if you can qualify. I don’t see Chapter 13 bankruptcies really being in the best interests of anyone.

Unfortunately, some people have been tricked or fooled into filing Chapter 13 bankruptcies. So far, I haven’t seen it come out as the best option for most. This is why:

• the payments are usually as high or higher than other types of programs, and
• you pay back as much or more than other types of programs,
• it’s more stressful,
• it’s more official
• it’s a court ordered payment.

If you don’t make it, you’re done! There’s no forgiveness, there’s no helping. You go through tough times! If you don’t make that payment, the Chapter 13 bankruptcy is over.

It’s also going to stick on your credit for seven years as a bankruptcy, which is one of the worst things you can possibly have on your credit report. It stays around for seven years after your payment plan is over. If it’s a five year payment plan, you’ve got 12 years of bad credit from that bankruptcy.

A Chapter 7 bankruptcy shows on your credit for ten years, but its usually completed within a few months. You’ve now got ten years that the Chapter 7 is going to be on your report, which is going to hurt your payment history. It will however, improve the other areas of your credit by wiping out your debt and optimizing your debt-to-income ratio and your debt to credit limit ratio. It eliminates those problems, whereas a Chapter 13 bankruptcy really cripples your payment history. Plus, with Chapter 13, you still owe a good portion of your original debt with payments over a long period of time so your debt-to-income ratio is not much better than before the bankruptcy.

You have to make the payment the judge sets, and it’s the maximum amount you can possibly pay, which is usually quite high. You’re not left with much to live on, and you don’t really have any say in the matter. Of course, it’s also not wiping out the utilization fees until it’s all over years and years from now.

If you can qualify for Chapter 7,  it might be a good choice for you if it’s the way you want to go. If you can only qualify for Chapter 13, my advice is to run! Give me a call. We can talk, see if there’s another option. I haven’t seen Chapter 13 work out well for most people. Usually, they make the decision to enter into it out of ignorance or bad advice.

Let’s look at Nicole, a client I worked with in Virginia. She’s in her early thirties and has a 20-month-old daughter. She had $53,000 in credit card debt. She and her husband had some challenges over the past few years with employment and steady income, so they fell behind. She used to have perfect credit. All the debt is in her name and once she fell behind the interest rates jumped up, the payments jumped up.

It started snowballing, she couldn’t keep up and so she went to see a credit counselor. Credit counselors put together a plan and gave her a payment. It was approximately $1,400 dollars a month for five years, and they said with a straight face: “Can you afford to live on negative 87 dollars a month?” And they were serious.

They actually started that program with credit counseling and dropped out after a couple of months because they simply couldn’t afford the payments. If  you can’t afford your current minimum payments, it’s kind of tough to afford something as much or more which is usually the case with credit counseling. But, once she dropped out she went to go see a bankruptcy attorney, and she asked if she would qualify for Chapter 7. The bankruptcy attorney said: “Well, we will get you qualified for bankruptcy, no problem.”

She didn’t qualify for Chapter 7 bankruptcy. So here is a woman who has a job,  makes $27,000 a year income, does not own a home,  has $53,000 in credit card debt, and she still doesn’t qualify for Chapter 7 bankruptcy.

Very few people qualify for Chapter 7 bankruptcy since these new laws were passed. You’ve got to be in a pretty tough situation. The best phrase I’ve heard to describe the new laws are that they are “very creditor friendly.” It’s too bad, because it really hurts the people that need the bankruptcy protection from Chapter 7. Unfortunately, a lot of people are getting dropped into the Chapter 13 category instead. There is usually a better option available.  They just don’t know about it.

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Here To Be An Asset To You,

Jesse Niesen

DebtGoToGuy.com