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Waiting out my creditors

Dear Dr. Don,
What are the advantages of declaring bankruptcy? Why can't I just ignore my debts for the seven years (five to go) and not pay anything to the bills? My income is just enough to pay my home and other necessary expenses due to a breakup. I will not be able to contribute to any of my debts. In fact, I need public assistance to help with food, etc. If I just ignore the debts, deal with the calls, letters, etc., doesn't the debt come off the credit report in seven years anyway?
-- Delores Debtor

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Dear Delores,
In your letter you state that your income is just enough to pay your home and other necessary expenses. Your view of your household budget may not match those of your creditors or the courts. What happens if a creditor files and wins a judgment against you and has the ability to garnish your wages or file a lien on your property? An employer can't fire you for a single wage garnishment, but it can use multiple garnishments as a reason for dismissal. You need to determine what's at risk if you merely ignore your debts.

You may be judgment-proof, meaning that your creditors don't have any means of collecting on the judgment. If you don't have a steady income or own property, then you may be judgment-proof, but if wage garnishment or a lien on your property is a possibility, then you're at risk. A judgment also shows up on your credit report for seven years from the day the judgment is filed. Your plan of having a clean slate in five more years can be easily derailed by this legal action.

Barring a judgment, your expectation that charge-offs, and collection accounts will fall off your credit report seven years from the date of the initial missed payment is correct. Accounts with delinquencies, however, that are closed by either the creditor or the debtor remain on your credit report for seven years from the date that the account is closed.

The advantage to a liquidating, or Chapter 7, bankruptcy is that you no longer owe the debt and you can start rebuilding your credit history. When you file for a Chapter 7 bankruptcy, the bankruptcy court will discharge all eligible debts and you no longer are under any obligation to repay those discharged debts.

The disadvantage is that the bankruptcy court forms a bankruptcy estate from your nonexempt assets and uses the proceeds from the sale of those assets to make partial payment to your creditors. Exempt assets vary by state.

A Chapter 7 bankruptcy filing stays on your credit report for 10 years, but you won't have to wait 10 years to apply and get credit. Most filers can qualify for credit about two years after the bankruptcy has been discharged. Learn more about bankruptcy by reading the U.S. Courts guide, Bankruptcy Basics, available on its Web site.

So, you can roll the dice and hope for the best by waiting out your creditors or file for bankruptcy and be certain of when and how you'll get a fresh start in rebuilding your credit history. Weigh what's at risk from the two options. Discuss your situation with a bankruptcy attorney to see if bankruptcy is right for you and what's at risk if you don't file for bankruptcy.

Bankrate.com's corrections policy-- Posted: July 21, 2004
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