Personal -
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.
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