Bankruptcy is Couple's Only Option. Or Is It?
By Eva Norlyk Smith Ph.D.
August 31, 2012
My husband and I are considering bankruptcy. I have lots of questions about property, retirement accounts, etc. We are struggling to make ends meet and are not able to pay our bills. We make good money but have a lot of credit card debit, two children and no savings. What are your thoughts? — Autumn
My thoughts about bankruptcy range from positive to negative. While walking away from your financial obligations can be a suitable solution to a major problem, it is certainly not right for everyone. Given the information you provided, though, I can’t tell you right now that it would be perfect for you.
Anyone who says, “Oh, you should just declare bankruptcy!” without analyzing your finances in great depth and discussing all the pros and cons of the process first is foolish.
I will give you the facts about Chapter 7 bankruptcy as well as its cousin, Chapter 13. After that, you’ll need to visit an accredited credit counseling agency to provide the bankruptcy education counseling services that are required to even begin the process.
When most people think of bankruptcy, this is the one they conjure up. It allows qualified filers to discharge most types of unsecured debt in court. All those credit card balances you’ve racked up? Gone.
However, with the good comes the bad, and if you own non-exempt property, such as expensive jewelry, several valuable vehicles and pricey antiques, you might have to surrender them. Cash is up for grabs, too. If you have more than a few thousand in a bank account, the excess might go to your creditors. In general, people do get to keep their personal residences, but it depends on how much equity they have in them. Each state has different homestead limitations and if the property you own is less than the limit, you’re fine.
Filing for Chapter 7 can be wise if you cannot pay your bills now and in the conceivable future. More, if you were to discharge the debt, it would allow you to pay your necessary expenses so you could get back on your feet for good. It should never be used as a short-term solution because, if you continue to spend more than you make, you’ll be back in the hole.
The other popular type of bankruptcy is Chapter 13, and it allows people to repay their debts through the courts. You can include all sorts of liabilities that you can’t discharge in Chapter7, including back mortgage payments, tax debt and legal fees.
The advantage is that you can keep all your property. Additionally, a portion — or even all — of the unsecured balances (such as your credit card bills) may be forgiven after the three-to-five year repayment period is up. The disadvantages include having to afford the payments and fairly expensive trustee fees.
Both Chapters 7 and 13 wreak havoc on a credit report. Notation of a 7 will appear for 10 years, and the 13 will stay for seven years.
So back to the beginning…should you pursue either of these legal options? The answer, again, is not before speaking with a qualified credit counselor. Not only will that person talk to you about which type of bankruptcy may be best, but also about a debt management plan that can save you from having to do either.
Or maybe you just need to reorganize your budget so you can afford to pay all of your important bills and save for the future.
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