Overwhelming Debt? Bankruptcy May Be Your Way Out, But Maybe Not
Things are bad, really bad. They have to be for you to be
considering bankruptcy. It's true that bankruptcy can wipe away
your debts, or most of them anyway. Taxes are exempt from
bankruptcy protection. You can declare bankruptcy, but if a
substantial portion of your outstanding debt is back taxes,
interest and penalties, you are not going to escape. If,
however, most of your debt is credit card debt, mortgage, car
loans and other consumer or business debt, there is a chance you
may successfully escape most or all of your financial
obligations.
Even so, is bankruptcy the best alternative for you? If you do
declare bankruptcy, which type of bankruptcy should you
consider? How will the new federal bankruptcy reform statute
that goes into effect on October 17, 2005 affect you. In most
cases you should be seeking qualified legal counsel for the
answers to these questions. The devil, as they say, is in the
details. You don't want to make a small mistake when declaring
bankruptcy, only to lose some of the protection to which you are
entitled. You only want to do this once. It will for follow you
around for 10 years in the case of a Chapter 7 bankruptcy. Make
sure your attorney is a bankruptcy specialist. Just using your
uncle Joe who happens to be a lawyer may be a big mistake.
There are two types of bankruptcy for private individuals,
chapter 7 and chapter 13. With Chapter 7 you can generally
escape from all debt with a few exceptions such as state and
federal taxes. You can keep certain exempt property as well.
There is a federal exemption list Most states have an exemption
list too. Most states require you use the state list but some
allow you to choose from either the state or federal list.
Property not on the list is sold to satisfy pay creditors.
Chapter 13 bankruptcy will require renegotiation and repayment
of your debts. You will first file a petition for bankruptcy
with the court and a trustee will be appointed. If your income
exceeds your expenses, you will usually be required by the court
to use the Chapter 13 option.
You will want to examine which alternative is the correct one
for you. In fact, there are other alternatives to serious debt problems besides
bankruptcy. One of these is a debt consolidation loan. Debt
consolidation loans are growing in popularity due to many
factors including the rise in homeowner's equity, record low
interest rates, and a dramatic increase in the level of consumer
debt. This option can be much more attractive than bankruptcy.
If you can keep from declaring bankruptcy, you will not have the
social stigma and long term credit issues to deal with. There
are literally hundreds of debt consolidation options available
from many different lenders.
A debt consolidation loan is basically just a home equity loan
used to pay off your higher interest debts. Because the loan is
secured by real estate or some other valuable collateral, you
get a substantially lower interest rate than can be had for most
unsecured debts, such as credit cards. This contributes to a
lower payment. In addition the term of the loan is usually
longer than a credit card, contributing further to lowering the
monthly payment. The decrease in monthly outflow can be just
what the doctor ordered and can prevent bankruptcy. Be advised
however, if the conditions that caused your monthly payments to
rise are not corrected, you risk ending up facing bad credit
problems again.
There are downsides to debt consolidation loans as well. First,
you could lose your home. Also, you use up the equity in your
home so you won't have to bail you out a second time.
Another alternative to bankruptcy is credit counseling. With
this option, a credit counseling firm works with you and your
creditors to arrange lower payments, make your debts current
(called re-aging), and even possibly forgo a portion of your
debt. This is an attractive option for many. It is being
mandated by the new federal bankruptcy legislation as a step
before bankruptcy in many occasions.
You may have to declare bankruptcy. It may even be the best
course of action for you. However, bankruptcy may not be the
best way to go and there are other alternatives. Do careful
research on bankruptcy and the alternatives and evaluate your
personal situation carefully before you make your decision.