In an effort to survive the economic fallout from the coronavirus pandemic, more and more Americans are going deeper and deeper into debt. Businesses are shuttering for good and workers are experiencing decreased wages or unemployment.
As an increasing number of families are becoming burdened with unmanageable debt, many are looking for solutions, including bankruptcy. Bankruptcy, however, is a complicated process with serious consequences, and certainly not the best solution for everyone. Let’s start by discussing other options you may have besides filing for bankruptcy, and then move on to an explanation of what bankruptcy is and what it can and can’t do for you.
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What are the alternatives to bankruptcy?
Bankruptcy is rather drastic and should be reserved for a last resort when you have exhausted your other options. And there are options to bankruptcy if you have income or assets that you can sell.
- Negotiate with creditors – Negotiate a payment plan with terms you can afford. If you have some cash, you can negotiate a payoff that is less than you actually owe. The best time to negotiate is during the last week of the month and make sure you get all agreed upon terms in writing.
- Create a debt elimination payment plan – You may have to negotiate with your creditors to do this, but start with one bill, such as a credit card, and work to pay it off. Once you have paid it off, move to the next. It may seem slow, but it is systematic and often manageable.
- Go to a credit counseling agency – These agencies can negotiate your debt for you, working with you to help you repay your debt to improve your financial status. The United States Department of Justice has a list of debtor education programs and credit counselors that have been approved by the U.S. Trustee Program, so you know they are trustworthy.
- Don’t do anything – This is not a great choice, but it is a choice. Of course, failing to pay vital debts like child support or taxes can get you into trouble and this route does have consequences. You can have difficulty getting credit for years to come (until the debt drops off of your credit report). If you have anything of value, a creditor can sue you and potentially get it. If you want to rent an apartment, rent a car, open a bank account, or do anything else that requires a credit check, you will probably be denied.
What are the different types of personal bankruptcy and how do I qualify?
There are six types of bankruptcy in the United States. Two of them deal directly with an individual’s financial situation. They are referred to as personal bankruptcy.
- Chapter 7 Bankruptcy – All or part of your debts are discharged, or cancelled, once you have used your liquid assets to repay at least a portion of the debt. Liquid assets can include checking or savings account balances, mutual funds, stocks, etc. To qualify, you must prove that your income is lower than the median income according to your state’s criteria. You must also seek credit counseling with a program that is approved by the U.S. Trustee Program. If you do not meet the income criteria, you will be disqualified from filing Chapter 7, but you can still file under Chapter 13.
- Chapter 13 Bankruptcy – You pay all or a portion of your debt over a period of three to five years on a repayment plan that you create and is approved by the court. Note that the pandemic has resulted in changes to the repayment period for Chapter 13. Learn more about these changes and be sure to consult with an attorney to find out if they apply to your situation. Payments are made to the trustee who will deal directly with your creditors – even if your plan has not been approved. Your creditors will have an opportunity to object to your repayment plan, but ultimately the judge presiding over your case has the final word. In order to qualify for Chapter 13, your unsecured debt (personal loans, credit card bills, etc.) must not exceed $394,725 and your secured debt (car loans, mortgages, etc.) must not exceed $1,184,200.
What are the downsides to bankruptcy?
You might look at bankruptcy and see a great way to get out of debt. It does offer you a fresh start, but there are downsides that you need to consider before you file.
- Your credit score will go down. The good news is, many experts say that the damage to your credit due to bankruptcy is not as bad as the damage caused by mounting debt if you do not file.
- New financing may be difficult. It won’t be as easy to get new credit as long as the bankruptcy is on your credit report, but there are many programs out there to help you rebuild your credit.
- You may not be able to discharge all of your debts. Alimony, back child support, and some tax debt very rarely get discharged. However, some student loan debt can be discharged.
- Your bankruptcy does not protect your cosigners. If you have cosigners, once you file your creditors may begin calling and harassing them.
Which debts can’t be discharged through bankruptcy?
When you file for bankruptcy, the judge may rule to discharge some of the debts that you owe. This can happen whether you file for Chapter 7 or Chapter 13. When a debt is discharged it means that you no longer owe it, and the creditor can no longer make attempts to collect it from you.
There are some debts that are not eligible for discharge. There are some exceptions, but they are extremely rare. For the most part, these debts cannot be discharged through bankruptcy.
- Debts you did not list in your bankruptcy filing.
- Child support
- Certain tax debts (tax liens, for example)
- Debts for injury to persons, or “willful and malicious injury to another person or property.”
- Debts related to personal injury or death of a person that was caused by the debtor’s operation of a motor vehicle while that person was intoxicated or under the influence of alcohol or other substances.
Filing for bankruptcy is a decision you should not make lightly. It can be a complex process that will impact you financially for several years. If you are considering bankruptcy, it is important that you have a good understanding of how it works, the pros and cons, as well as the options available to you. Before you file it’s a good idea to ask a lawyer what your most strategic move should be.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.