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  Dear
Steve,
I have been out of work for a while and I've been unable to pay
on my debts. I'm considering bankruptcy to get a clean slate and
start anew. What would be the best plan of action?
-- James
Editor's note: On the afternoon of April 14, 2005,
the House passed the bankruptcy bill, clearing the way for President
Bush to sign it into law.
 Dear
James,
The timing of your letter is good. The Senate
has just passed a bankruptcy reform bill that is expected to pass
the House and be signed by the President very soon. The reforms
to existing bankruptcy legislation will make it more difficult to
qualify for bankruptcy protection. Other changes in the bill could
complicate the matter for some people.
Let's see if you are good candidate for bankruptcy
before we get into the nuances of the bankruptcy legislation and
its potential effect on you.
You say you can't pay your bills because you are out
of work. This alone tells me that you should not consider bankruptcy
right now. Let's say you filed for bankruptcy tomorrow. Yes, all
your outstanding unsecured debts would be wiped out. But next month,
you would still have living expenses and without work, your income
may not be enough to cover them. So what happens then? Bills pile
up, they can't be paid, and you will have used up your bankruptcy
"bullet."
Also, as you are looking for work, the bankruptcy
may become an impediment to finding jobs in certain areas. Professions
that require licenses or security clearances often have a prohibition
about recent bankruptcies. So based on these two considerations,
you would probably be better served to consider filing only after
you have found a new job.
I believe bankruptcy should be a person's last option
after all other alternatives to get out of financial trouble have
been ruled out. Other options include increasing your income or
cutting expenses to help pay down your debt. Of course, in your
situation the reason you are in your current circumstances is because
you don't have a job to bring in income. However, cutting expenses
is an option even if you are living on unemployment. I know this
from personal experience. Earlier in my career, I was out of work
for more than a year. It isn't fun.
The next option is to contact your creditors and see
if you qualify for a hardship program. As someone who is unemployed,
you may well qualify to get enough relief, which in conjunction
with expense cuts, may allow you to make it until you can find employment
and begin to make payments again.
Another solution may be to contact a credit counselor
to help you determine if bankruptcy is the only answer for you.
This will become a requirement before filing under the new legislation.
If you decide that bankruptcy is the best solution
for you, I recommend you discuss your situation with an attorney
before October of this year, when the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 will likely become effective.
Below are some of the provisions included in the act that could
potentially impact your decision-making:
- To qualify for Chapter 7, in which debts are forgiven
after forfeiting some assets above a certain level, you will have
to undergo a bankruptcy means test. If your income is greater
than the median income for your family size in your state and
you can pay at least $6,000 over five years or $100 a month, you
will be required to file under Chapter 13 which requires you to
repay at least a portion of your debts.
- You will have to pay the full amount owed on your
car loan regardless of the condition of the car, as opposed to
paying only what your car is worth under the current law.
- Bankruptcy attorneys must certify your financial
statements to the court and will be held financially responsible
if the statements are false, which means attorneys may charge
more.
To sum up how the new legislation may affect you:
It will be more difficult to erase your debts unless you are in
really dire straits; you may have to pay more for an attorney; and
you will have more to pay on certain debts, especially car loans.
My advice is to determine if bankruptcy is really
your only option and if it is, do it when it actually solves more
problems than it will create. When it comes to personal finance
troubles, there is no magic wand and no free lunch.
Good luck.
Steve Bucci, the Debt Adviser, is the president
of Consumer Credit Counseling Service of Southern New England. Visit
CCCS
for additional debt
advice or ask your debt question here.
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