Solving Dept Problems Without Bankruptcy

Alan Kopit, lawyers.com Legal Editor

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Tips for Making Savvy Financial Moves Even When Purse Strings are Stretched Tight.

With consumer debt at an all time high, payment problems plague many people.  Whether your problems are the result of losing your job, a divorce, an illness, or simply overspending, as you get deeper into debt, your problems can seem overwhelming.  Record numbers of consumers are filing for bankruptcy protection, but it is important to consider all of your options before going to bankruptcy court.

DON'T JUMP AT THE BANKRUPTCY OPTION 

Filing for bankruptcy is a serious step that should be taken only as a last resort, and only after weighing the pros and cons with an attorney experienced in bankruptcy law. Most troubling is the fact that filing for bankruptcy will stay on your credit record for ten years, while other unfavorable information in your credit file stays there for only seven years. A credit record with unfavorable information may make it more difficult for you to get a mortgage for your house, to rent an apartment, to obtain a car loan, or to start a new business. Finally, bankruptcy does not necessarily discharge all of your debts, which means that you will remain liable for debts like most taxes, alimony, child support, and student loans even after going through the bankruptcy process. That's why if you can work out your payment problems in other ways, you should try to do so.

1. Talk with your creditors. Talking to your creditors is a necessary first step to resolving your debt problems.  By explaining the reason that you have fallen behind in payments (such as divorce, losing a job, or an illness), many creditors may be willing to work with you to satisfy your obligation.  A creditor understands that if you don't pay, it will be an expensive and time-consuming effort to collect the debt.  Forcing you into bankruptcy may mean that the creditor collects little or nothing on the debt in the long run. That's why most creditors will work with you to come up with a payment plan if you demonstrate that you are not trying to avoid your obligations altogether. 

2. Contact a credit counseling service.  Organizations such as the Consumer Credit Counseling Service exist in most cities.  These organizations will help you negotiate payment plans with your creditors, which may require you to deposit money each month with the counseling service.  The service then pays your creditors according to your negotiated plan.  One important feature is that charges for this service are very modest, and often free.

3. Carefully consider consolidating your debts.  The problem with dealing with many creditors is that some of them may not want to negotiate a payment plan without knowing what the other creditors are willing to do.  By consolidating your debts, you only have to deal with one creditor. The primary danger of this approach is that if you use a credit card or take out a second mortgage on your home to consolidate your debts, you may be risking more in the long run (such as losing your home) if you can't meet your monthly payment.   Be sure that you can make these monthly payments before opting for a consolidation loan.

4. Finally, if all else fails, consider bankruptcy only after consultation with a lawyer.  To weigh the pros and cons of filing for bankruptcy, be sure to contact a lawyer experienced in bankruptcy practice. There are credible and easy ways to find bankruptcy lawyers and help in your community, such as the online resource www.lawyers.com.

BANKRUPTCY MAY BE THE ONLY ANSWER

People should file for bankruptcy when they have made a good faith effort to repay their debts, but see no way out other than to file.  Its long lasting consequences (remember: filing for bankruptcy stays in your credit record for ten years), however, make bankruptcy a last resort. 

There are several advantages to filing for bankruptcy, the most important being that you obtain a fresh financial start when the bankruptcy is over.  In addition, collection efforts must stop as soon as you file, and you may be able to keep what are called "exempt" assets (defined by federal and state law).  That means that not all of your assets will be sold to satisfy your debts.  If, for example, you are a senior living on social security, a pension or you are receiving other retirement benefits, there is a good chance that you will be able to keep most of these in a bankruptcy because these are deemed to be "exempt" assets (with some exceptions).

The two most common types of bankruptcies available to consumers are:

1. A "straight bankruptcy" under Chapter 7 of the bankruptcy laws.  This type of bankruptcy involves taking most of your property.  After filing the bankruptcy petition, the court appoints a trustee to sell your non-exempt assets and to distribute the cash received among your creditors on an equal basis.  After the creditors have been paid - even if they have not been paid in full - you are no longer liable for these debts.  You then start over again with a clean financial slate - except that the fact of the bankruptcy will remain on your credit record for ten years.

2. A "wage earner's bankruptcy" under Chapter 13.  This type of bankruptcy allows individuals who have steady incomes to pay all or a portion of their debts under the protection of the bankruptcy court.  Under this option, you file a bankruptcy petition and a proposed payment plan with the bankruptcy court.  The repayment period is up to three years (five years with the special permission of the court).  An important feature of Chapter 13 is that you are permitted to keep all of your assets while the plan is in effect and after you have successfully completed it.

HELP IS AVAILABLE

To contact the Consumer Credit Counseling Service, call 1-800-388-2227 or access its web site at www.cccservices.com.  To find a lawyer to help you weigh the pros and cons of bankruptcy, check www.lawyers.com or call your local or state bar association and ask for the names of lawyers who specialize in bankruptcy practice.