Should you file for Bankruptcy?
When your debts are beyond your ability to repay, and you have no hope of getting enough funds to pay them reasonably soon, Federal law allows you to relieve some (or all) of the burden with bankruptcy. Here is some general information:
- Chapter 13 is available to everyone and is the one you must use if you are trying to stop foreclosure on your house.
- Chapter 7 is reserved for those with incomes below an amount which varies from state to state (it is based on your state's median income). Rules vary from state to state, but Chapter 7 often does not affect your mortgage or other "secured" debts, like car loans.
Chapter Thirteen bankruptcy
To file for Chapter Thirteen bankruptcy requires that you pay back at least some of your debt. But the courts usually set up a plan that you can live with.
A bankruptcy lawyer told me that a typical Chapter 13 case that he handles works like this:
The back debt owed on the mortgage is combined, future interest is eliminated, and it is paid off over time at a reasonable rate per month. So if you are, say, $10,000 behind on your mortgage payments with interest piling up, you could freeze that amount (no more interest will be added) and pay it back over a few years at so much per month. Current mortgage bills must be paid as before. Other debts are typically paid off at 10 to 20-cents on the dollar.
This is similar to a "debt management plan," except it is the court, not your creditors, that decides how much you have to pay; and the terms are usually much better. Also Debt Management plans do not deal with mortgage arrears.
Chapter Seven bankruptcy
Chapter Seven bankruptcy allows you to eliminate all or most of your debt (some categories, like mortgages, auto loans, Sallie Mae student loans and unpaid taxes are excluded). It is not available to people who earn more than a certain amount, which differs from area to area. You can protect the equity in your house up to a certain amount that varies by state (that is, the court cannot make you sell your house to pay your debts), and you can usually keep your car if you make payments. But you will still owe whatever mortgages you have outstanding on your house.
Chapter Seven is most useful if you have large amounts of credit card debt and/or large medical bills.
Whenever I mention bankruptcy to people they tell me "It will ruin my credit." I usually respond that their credit has already been ruined and that bankruptcy might actually improve it!
Times and attitudes of lenders have changed. Those who make secured loans, such as on a house or car, have really loosened up in the last few years and we have seen people get car loans and mortgages shortly after completing a bankruptcy. (In some cases, very shortly!) The rates are higher than they might have been, but they are not necessarily outrageous.
I know several people (and the odd relative) who have chosen this course to deal with overwhelming debt, and it has worked out quite well in almost every case.
If you simply cannot manage your debts, I think this is a course you should consider carefully. It could be the best solution to your problems.
A Lawyer is required for bankruptcy
Don't try to do this alone. Find a bankruptcy lawyer. Usually they will give you a free consultation.
An Alternative Resource:
We are focused on US consumers. For Canadian visitors, Bankruptcy Canada is an extensive site with numerous archived articles on debt and personal bankruptcy. Although we are not endorsing specific information at the site, it is a rich source of information for consumers in Canada.