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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Couple with huge medical and other debts could file for Ch. 7 or Ch. 13
Bankruptcy Adviser

Debt mounting? Ch. 7 or Ch. 13 are options
 

Dear Bankruptcy Adviser,
My husband had a transplant a few years ago. One year later, we purchased a new home. We knew the drugs would be expensive but planned for most to be covered by insurance. Long story short, we ended up with more than $30,000 in medical (bills) two years in a row. We are now $100,000 in credit card debt. We now have insurance that covers the meds but just cannot get caught up. We are behind on our mortgage and credit cards.

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I make too much money, $55,000 a year, to qualify for a Chapter 7 (bankruptcy), and my husband brings home $1,100 a month in disability. He has been desperately trying to find a job now that he is well, but obviously this has not worked out yet. We are in our early 50s, and the thought of bankruptcy is almost more than we can take. I can borrow from my retirement but keep thinking he'll find a job and bail us out. We are sick over this predicament we are in. We've always had good credit and now have numerous 30- and 60-day delinquencies. We would appreciate your advice.
-- Jan

Dear Jan,
I know you must feel like the walls are caving in. You are getting hit with unforeseeable and unmanageable debts. However, you do have options, albeit limited ones.

You state that you do not qualify for Chapter 7 bankruptcy. I hope that you had a thorough consultation with a local bankruptcy attorney. Make sure that the attorney did a detailed review and not just a general one. You want to get an analysis as to whether the presumption arises that you can pay back some of your creditors.

Options:
1. Chapter 7 with thorough consultation
2. Chapter 13 reorganization
3. Nonprofit payment of medical debt
4. Credit counseling

1. Chapter 7 with thorough consultation
Do not rely on an incomplete analysis or a verbal denial that you do not qualify. It probably is worth the cost of paying an attorney to review six months of paystubs and providing a detailed expense breakdown.

For starters, do not base your decision on the average income in your state. Many clients have thought that they automatically wouldn't qualify for Chapter 7 bankruptcy if they make above the average income in their state. This is not true.

In the end, you might be correct, but at the very least you were thorough and received detailed advice.

2. Chapter 13 reorganization
Chapter 13 bankruptcy might be your only viable option. This is a three- to five-year repayment plan with the court. The payment will be determined based on your income and reasonable and necessary expenses. All remaining balances owed on the credit cards and to the hospitals will be eliminated after you complete the Chapter 13 repayment plan.

As long as you make your monthly payment, you will be protected. The creditors cannot sue or harass you.

3. Nonprofit payment of medical debt
You should search for a nonprofit organization that might help you with your medical bills. The Internet is an excellent resource to find these organizations. You also could contact local, state or federal representatives. Many U.S. congressional offices are perfect sources of information.

4. Credit counseling
Most credit counseling agencies work with only a limited number of creditors. You should explore this option, but only use their services if all your creditors are paid through the program. I believe it is impossible to pay some creditors through credit counseling organizations while paying other creditors outside of the counseling plan. The multiple payments usually are simply too high.

Ignoring the problem is the worst thing you could do. I cannot even begin to imagine the stress you are under, but add lawsuits, wage garnishments, even bank levies, and you could go over the edge. You must proactively address the problem so that you can make a decision immediately.

Bankrate.com's corrections policy -- Posted: Feb. 3, 2009
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