Debt Relief
Traditional Debt Relief Strategies
Bankruptcy
There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7, also referred to as a liquidation bankruptcy, erases all debts that are legally capable of discharge. Chapter 13 bankruptcy reorganizes debt into a repayment plan over a period of three to five years.
In order to qualify for Chapter 7, the filer's income must fall below the median income of their state. If the filer's income is over their state's median, then they must take a "means test" to establish their eligibility. The means test assesses the filer's ability to pay back their creditors by looking at debt and income over the previous six months. If there is any income remaining each month to pay creditors, they will fail the means test and have to file Chapter 13.
In a Chapter 7, any assets you have over an allowed value will be sold (liquidated) to at least partially satisfy creditors, and the rest of your qualifying debt will be forgiven. The process takes from four to six months, and you will be required to complete a credit counseling program with a government-approved agency. You will not qualify for a Chapter 7 bankruptcy if you have filed another bankruptcy within the past six to eight years.
With Chapter 13 bakkruptcy filings, instead of selling your assets to pay creditors, you get to keep those assets, but agree to pay some or all of what you owe to your creditors over a three to five year period. You will be required to enter credit counseling from an approved agency. Then you'll start making payments. Priority debts, like back child support and tax obligations, must be paid off in full and are not included in the restructuring plan. Then you will be required to make normal payment on secured debts, like home loans and auto loans once you reaffirm4 the debt. Money left over will go towards repaying unsecured debt like credit card debt. When the debt repayment period is over, any remaining balance you owe on unsecured debts will be eliminated.
Bankruptcy can:
- Eliminate credit card debt, personal loans, and unsecured debt. Filing bankruptcy wipes out unsecured debt, since no collateral was pledged.
- End harassment from creditors and collection agencies. Not only will you end phone calls and letters, but you might also stave off repossession or foreclosure.
Bankruptcy cannot:
- Prevent repossession. Bankruptcy eliminates unsecured debts, but does not remove secured loans. If you secure a loan with property, bankruptcy eliminates the loan but may still allow the lender to repossess the property securing the loan.
- Wipe out child support and alimony. Even if you file for Chapter 7, these debts are considered priority debts and must be paid.
- Eliminate outstanding student loans. While it is possible you can show that repaying a student loan causes "undue hardship," proving undue hardship is incredibly difficult.
- Wipe out tax debt.5
- Wipe out judgments, fines, penalties, or traffic tickets.
Perhaps the largest disadvantage to bankruptcy is its impact on your credit rating. Chapter 7 stays on your credit report for 10 years, Chapter 13 for 7 years. A bankruptcy can make it nearly impossible to get a mortgage for up to five years. It will make it harder to buy a car, get life insurance, qualify for other forms of credit, and sometimes even to land a job. A bankruptcy is the single worst thing you can have on your credit report. Finally, even the simplest of bankruptcies will cost you around $2,000. If you had that kind of money lying around, I bet you would still be making your minimum payments.
Here's the bottom line: if you qualify for Chapter 7, it is a viable debt relief option despite its damage to your credit report. If you only qualify for Chapter 13, I recommend looking into other options such as debt settlement or this program. By including all of your debts in a Chapter 13, you are giving up your rights to dispute any of that debt down the road, which—as you will learn shortly—can be a powerful debt relief strategy.
So, let's review the pros and cons of bankruptcy.
- Pro: Collection activities stop. The bankruptcy court will issue an automatic stay halting debt collection activities and any pending lawsuits.
- Pro: If you qualify for Chapter 7 you can get rid of most of your debts and get on with your life in a matter of months.
- Pro: Chapter 13 allows you to keep your assets and potentially eliminate unsecured debt.
- Con: Bankruptcy is a nuclear bomb to your credit score and credit report. The "fallout" sticks around for 7 — 10 years and makes borrowing much more costly.
- Con: Chapter 13 is the least favorable and most common form of bankruptcy filing. You'll pay back a good portion of what you owe and still have "bombed" credit to boot. This is an expensive proposition in the short and long-term.
- Con: You affirm your debt obligations in Chapter 13, making it more difficult to employ other debt relief tactics down the road.
(To find out if bankruptcy might be right for you, contact a bankruptcy attorney in your area by filling out the form to the left.)
4. A process where the borrower agrees to pay the existing note off in full under the terms originally signed.
5. You can discharge tax debt in Chapter 7 in some rare cases.
