debt

When to choose bankruptcy over debt management

Steve BucciQuestionDear Debt Adviser,
I have more debt than I can handle, and I am enrolled in a debt management plan. However, my expenses still amount to more than I bring home, and the debt management agent knew this going in. They calculated my debt payment as $344 with the program, and they never advised as to whether I should file for bankruptcy. Should I have filed for bankruptcy instead? If I file for Chapter 7, would I have to include all of my debt including personal loans?
-- Shirley

AnswerDear Shirley,
Slow down, Shirley! You have a lot going on here, so let's take things one at a time. First, you should not have been enrolled in a debt management plan if your income level does not allow for the monthly payment. Call the debt management agency as soon as possible, and ask to speak with a supervisor. Have them go over your case from start to finish. If a mistake as big as putting you in an unaffordable plan was made, other issues may have been overlooked as well. Find out if your payment can be lowered to what you can afford. Many agencies can offer a hardship debt management plan titled a "call to action," which lowers the interest rate on your credit card accounts to the lowest possible level. That may decrease your monthly payment enough to make the debt management plan work for you.

A reputable credit counseling agency will not enroll persons in a debt management plan unless the counselor has provided a spending plan that balances income and expenses. If you are having trouble meeting your monthly payment because you are not following the spending plan provided by the agency, then you have a decision to make. Either get back on track and spend only as the plan allows, or increase your income with a part-time job or other income source.

Second, as for bankruptcy advice, I'm not surprised the counselor didn't give you any. Only an attorney can give legal advice, and bankruptcy is a legal process. However, your counselor can and should go over the pros and cons of filing for bankruptcy and whether it would make sense for you to get a legal opinion for your particular situation.

Third, should you find you absolutely cannot afford to make your payment and want to explore bankruptcy, I recommend you contact an attorney who specializes in consumer bankruptcy. To qualify for a Chapter 7 filing (in which your debts are forgiven and not repaid) your income must be below the median income for your state.

You would typically include all your debt in a bankruptcy filing, but you can file a reaffirmation document for a particular debt(s) if you have a good reason for doing so. You and your attorney will have to sign the reaffirmation document that states you can afford to repay the debt and it will not be an undue hardship on your post-bankruptcy budget to continue to pay the debt you would like reaffirmed. Typically, unsecured debts would not be included in a reaffirmation, which would include personal loans. Most reaffirmations would be for car or mortgage loans. I'm not sure why you would want to reaffirm a personal loan, but if you can convince the court and your attorney that it would be in your best interest to do so, you could file a reaffirmation for the debt.

Lastly, you wanted to know if you should have filed instead of going on a debt management plan. My answer is that if the debt management plan can be made to work, you are usually better off. A bankruptcy can stay on your credit report for up to 10 years. A poor credit report may affect your ability to get a decent apartment, home or insurance for years to come. If you have no other way out, then you may have no choice but to file. Just be sure you consider all the potential ramifications before you decide.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of the Debt Adviser, go to the "Ask the Experts" page and select "Debt" as the topic. Read more Debt Adviser columns and more stories about debt management.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
CREDIT CARD WEEKLY NEWSLETTER

Get advice for managing credit cards, building your credit history and improving your credit score. Delivered weekly.

Debt Adviser

Charged-off debt still on me?

Dear Debt Adviser, If a debt is charged off, am I responsible for paying off that debt? -- Jenny Dear Jenny, Yes, oui, ja, da, si and dui. In any language, including good ol' American legalese, you must pay. But don't... Read more

advertisement
Partner Center
advertisement

Connect with us