debt

3 options for debt woes, none of them good

Justin Harelikq_v2.gifDear Bankruptcy Adviser,
I had a heart condition that landed me in the hospital in September 2008, which caused me to lose the part-time job I had. And with medical costs, I got behind in credit card payments and now I don't have any way to catch up. The only thing I have in income is Social Security. My question is: If I filed for bankruptcy in 2004, can I file again? There is no way for me to catch up, and I can't find work because I am sick.
-- Nelson

a_v2.gifDear Nelson,
It is heart-wrenching to hear your story and even less inspiring to give you the available options, which are very few.

1. Do nothing
Technically, you are judgment-proof. This means that creditors can get judgments against you, but so long as you have no other valuable assets, such as a home with equity or an investment account, the creditors cannot do much against you.

However, you are not harassment-proof. Creditors can call and drive you to the brink of insanity, trying to get you to pay. The majority of collection agents are reasonable, good people just doing a job. But one nasty, unprofessional collection agent could make all the others seem irrelevant.

The biggest risk you face is that a creditor could sue you, get a judgment, find out where you bank and place a levy on that bank account. A bank levy is a seizure of property by judicial process, allowing the creditor to have the local sheriff seize your assets. In basic terms, the creditor gets a judgment and then gets court approval to seize all that you have in the bank until the debt is paid in full.

While Social Security funds are exempt from a bank levy, the bank will still execute the sheriff's order to levy your account. Banks are not obligated to determine whether funds in your account are from Social Security or a job. If your account is levied, then you are solely responsible to prove to the court that those funds are exempt, or protected, from a creditor's claims.

2. File for a low-payment Chapter 13 bankruptcy
You can file Chapter 7 bankruptcy every eight years. Therefore, you cannot file again until 2012 because you filed in 2004.

However, you can file for a low-percentage Chapter 13 bankruptcy. The court could confirm, or approve, a repayment plan, where you pay none, some or all of your debt over a three-year period. Your payment could be as low as $100 to $200 per month, depending on your other expenses.

There are a few restrictions. The key one is that because you received a discharge in the 2004 Chapter 7, meaning the debt was eliminated, you must wait four years from the date of filing for the Chapter 7 to file for a Chapter 13 bankruptcy if you want to receive another discharge. Still, after the three-year Chapter 13 payment plan, all the balances remaining on the credit cards and hospital bills will be eliminated, if you are eligible.

While you can file a Chapter 13 on your own, this type of bankruptcy is much more complicated than the more common Chapter 7. You can use an attorney for the Chapter 13, but it might be too costly to pay for legal assistance. And few, if any, nonprofit organizations can help with Chapter 13 bankruptcy.

3. Credit counseling or debt negotiation
These options are likely impossible based on your income. You would be required to make monthly payments that would likely be higher than any Chapter 13 payment. As I said, your options are limited. Doing nothing might be possible while allowing you to avoid filing for a Chapter 13 bankruptcy. Eventually, you will be eligible for another Chapter 7 bankruptcy, which is the type of relief you need.

Read more Bankruptcy Adviser columns and more stories about debt management.

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