Get the facts on bankruptcy
Bankruptcy can be frightening. It can also be a solution when there's no other way around your debt. Here are tips and suggestions to consider if you're facing that possibility.
1. See if you can solve your financial problems without a bankruptcySome avenues to consider:
- Do your creditors (like credit card companies or hospitals) offer any kind of hardship or low-interest repayment programs for your debt?
- If you're having problems dealing with a specific creditor or two, could an attorney or credit counselor (make sure you work with a nonprofit group associated with the National Foundation for Credit Counseling, or NFCC, or the Association of Independent Consumer Credit Counseling Agencies, or AICCCA, help you negotiate a payback arrangement?
- If you have a pile of debts, could a debt reorganization plan (with reduced amounts or interest rates) be a solution? You can get help with that through a credit counselor. Again, look for a group affiliated with the NFCC or AICCCA.
2. Don't file until you've fixed the problemHave you remedied the problem that put you in debt (unemployment, medical bills, etc.)? Unless you have, that clean slate is going to be a waste of time. Six months from now, you'll just have a new set of bills and no bankruptcy options.
Talk to several professionals (attorneys, CPAs or credit counselors affiliated with the NFCC or AICCCA). Then weigh the advice and decide what options work best for you.
3. Don't be confused about the 2 types of bankruptcyYour options will probably depend largely on your paycheck. Under the new rules, you have to qualify for a Chapter 7 (full or partial debt liquidation). Otherwise you'll be filing for a Chapter 13 (debt reorganization plan). But a Chapter 13 bankruptcy may make it easier to salvage valuable assets, like a home or car.
4. Considering a Chapter 7 (liquidation) bankruptcy?Chapter 7 bankruptcy will:
- Liquidate bills rather than arrange a repayment plan. But assets, if there are any, are sold to pay creditors.
- Sometimes allow filers to retain some assets (like home or car), but that varies depending on the state and situation.
- Require filers to meet a means test (or qualify for an exemption).
- Take roughly four to six months to complete (though that can vary by location).
- Stay on your credit report for 10 years after bankruptcy is granted.
- Costs upward of $1,000 (and possibly several thousand).
5. Considering a Chapter 13 (reorganization) bankruptcy?Chapter 13 bankruptcy will:
- Put filers on a repayment plan. They are given a living allowance for basic needs and the rest of their money is targeted to pay off debts.
- Stay on the credit report for the length of the repayment period, plus seven years.
- Make it easier to keep assets, such as a home or car. (Again, this will vary depending on the situation.)
- Cost about $1,500 to $3,000.
6. You can cut the cost of filing for bankruptcyThere are provisions for waiving some of the filing fees, if you need them. Discuss that with your attorney during your initial (and, it is hoped, free) consultation.
7. Bankruptcy doesn't have to mean giving up your carYou may be able to reaffirm your loan and keep the car. But you want to do the math on the payments and car costs to decide if this is a good move. Want to rebuild your credit after bankruptcy? Make sure your lender reports the reaffirmed loan (and payments) to the credit bureaus.
Under certain circumstances (including owning a car at least 910 days -- or 30 months), you may be able to keep the car, refinance your car with a new lender at the car's current fair market value and have the balance of the old debt discharged under bankruptcy. But this can be complicated, so have an attorney walk you through it.
8. Grow your emergency fundIf you've gone through a bankruptcy, you can't get a loan or hit the credit cards when life's unexpected expenses hit. When you've discharged your Chapter 7, make building an emergency fund your first priority.
If you're in the middle of repaying your debts with a Chapter 13 plan and money is tight, try to brainstorm ideas (a garage sale, or selling on eBay) to stash some cash for emergencies.
9. Here are a few free tools to assist: