Bankruptcy better than waiting out debt

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Dear Bankruptcy Adviser,
I had great credit for years. After a bitter divorce, I was left with nothing. I lived on credit cards and a small amount of savings, making minimum payments as long as I could. I finally stopped paying them about two years ago when my savings were gone. Some of these debts have been charged off and some have been bought by collectors. I am not working and have no income — no wages, no welfare, no Social Security, no unemployment insurance, nothing. I have no assets except my clothing. I anticipate being employed within the next year and would like to know how to rebuild my credit. Would it be better to just let all my bad debts stay as they are or should I file for bankruptcy and start over with a completely clean slate?
— Rose

Dear Rose,
I can only imagine that writing this must have been very difficult, even demoralizing. I hope you are staying somewhat positive and not drowning in self-doubt because you are thinking about bankruptcy. To be frank, I would be shocked if you are remaining positive. I can only imagine your confidence is very low.

One important note: A “charged off” balance does not mean the debt has disappeared. Collection agencies could still buy that debt and attempt to collect.

You have two options:

1. Wait out the statute of limitations

You say that you have not paid the bills in close to two years. That means that in most states, you are close to halfway to the end of a debt statute of limitations period. The statute of limitations is a law that sets the time within which parties must take legal actions to enforce their rights. Most states provide creditors a four-year period to start the judicial process against you, that is, sue you.

You can contest any lawsuit if it is filed after a debt statute of limitations period has run out. In general, the period begins at the date you made your last payment to the creditor or the last time you used a credit card, whichever is later.

It is possible that none, some or all of the creditors will sue you. Creditors will look at various factors before deciding whether to sue: your age, job title or job status, property in your name, and whether you’re married or single.

For example, a creditor is less likely to sue a 65-year-old widow with no property and living only on Social Security. However, a 35-year-old single person with a job is likely to be sued because that person has 30 more years to work and pay off a judgment. In general, judgments are good for 10 years from the date the judgment is entered and can be renewed numerous times, each time for an additional 10 years.

Hopefully, you will start working again soon. That might give you the means to settle with any creditor that sues you.

2. File bankruptcy

You appear eligible to file for Chapter 7 bankruptcy which means you can wipe out your legal liability for these bills. You can file on your own, with a document preparer or an attorney. Obviously, the least expensive option is to file on your own.

You can also apply for fee waiver of the court fee ($299) and credit-counseling certificates (about $90 for the pre- and post-filing certificates).

Your case is not complicated, but I understand that completing the paperwork could be overwhelming. There are a few nonprofit organizations that could assist you. Unfortunately, I know that these organizations are overwhelmed and understaffed for the number of people requesting this service.

Hopefully, you can remain confident and positive with your final decision.

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