Dear Bankruptcy Adviser,
I'm trying to weigh my options. I have about $13,000 in old debt (about 5 years old), about $7,000 in current debt (credit cards), and now I'm being sued for $2,800. On top of that, I owe $1,700 in back taxes, which is under a payment agreement. I have to pay steep penalties and interest with the repayment, and I feel so overwhelmed. I can't keep current on monthly bills such as utilities and car payments. Can you please advise what may be my best option: Chapter 7, Chapter 13 or credit counseling? Thank you.
I am inclined to say "none of the above." However, the lawsuit may be the decision-making event for you. Once the lawsuit turns into a judgment, it can become a wage garnishment or bank levy. Since you already are having issues paying your monthly bills, a garnishment of 25 percent of your take-home income or the unknown bank levy could force you into bankruptcy.
Let's look at your debt and assess your options:
Old debt of $13,000:
Creditors have from as little as three years and as long as 10 years (10 years only in Rhode Island) to collect a debt. Most states generally have a four- to five-year statute of limitations period. The period can be up to 15 years for some types of debt. Called the "statute of limitations," it means unless the creditor sues you and gets a judgment, the creditor can only ask you to pay the debt. The time period begins on the date of the last payment on the debt or the last time you used the credit card. You must know exactly when the statute of limitations runs on these debts. If it has run, you definitely do not want to pay one penny on this debt. Making a payment starts the statute all over again. That would be a complete disaster.
Once you are beyond the statute of limitations time period, I would never advise someone to pay back this debt.
$7,000 in current credit card debt:
The key here is whether you are current on the payments. Being current gives you the option to enroll in a credit counseling program. You will consolidate the debt and make one monthly payment to the credit counselor who in turn will mail a payment to each creditor. This could be a viable option so long as all creditors are included in the credit counseling plan, and you can afford the payment comfortably.
$1,700 back taxes:
You can talk to a bankruptcy attorney to see whether these taxes can be eliminated in a Chapter 7 bankruptcy. There is a very specific test to determine whether taxes are eligible for a discharge. While I would not file bankruptcy to only eliminate this debt, you would consider bankruptcy if it were possible to eliminate the taxes, the $7,000 in credit card debt and the $2,800 lawsuit.
Otherwise, you want to continue making a monthly payment to the taxing authority. Yes, you would continue to have penalties and interest, but those additional expenses would probably be cheaper than the fees associated with a Chapter 13 bankruptcy.
This debt could be your downfall. Once the creditor gets a judgment, you will be given a very short period of time to start a payment plan on this debt. The creditor will try to find bank accounts to levy and will try to find where you work to garnish your wages. The above options would become impossible once that happens. Bankruptcy, either Chapter 7 or Chapter 13, would become your only option.
You need to see what payment the pending judgment creditor wants each month. That will let you know whether you can afford that payment as well as payments to the other credit cards and delinquent taxes. I think your decision will be easy once you know what the judgment creditor requires you to pay.
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