Editorial Policy

Bankruptcy options when bills can't be paid

Erica Sandberg

December 5, 2014

QHi Erica,

Would it be worse to file for bankruptcy or just not pay my bills until they come off my reports? My phone does not stop ringing — even my cellphone. What should I do? –Pete

ADear Pete,

With so little information to go on, it's impossible (in fact, irresponsible) to provide specific advice. However, I can give you a summary of the legal approaches to debt resolution and you can make your own decision.

The two most common types of bankruptcy for consumers are Chapters 7 and 13. With both, the phone calls and letters from creditors stop after filing. That can be a huge relief. Ask Erica

With a Chapter 7, you are formally freed of such debts as credit card balances, hospital bills and collection accounts. To qualify, you would have to earn no more than the median income for your state or prove that you can't pay your creditors. If you have assets that can be sold and applied to what you owe, you may have to give them up. That includes cash in savings and investment accounts, although most retirement plans are exempt. The process is quick, too. Go through approved bankruptcy counseling and education, appear in court, then wait for the ruling. Most proceed without a hitch. A bankruptcy notation is placed on your credit report and remains there for 10 years.

Chapter 13s are court-supervised repayment plans. They allow you to keep all of your property while paying down at least a portion of your debts over three to five years. In general, as long as you can afford the combined payment (plus the trustee fees, which is like an administration charge) you can use this bankruptcy. You can bundle all kinds of debts that are non-dischargeable, such as child support arrearage and parking tickets, but they would have to be repaid in full. A major advantage is that interest and fees are usually suspended, potentially saving you a lot of money. A Chapter 13 bankruptcy is removed from a credit report after seven years.

As for the “just give up” way of dealing with your debts, there are two circumstances when simply not paying your creditors can make sense. The first is if the debts are past the statute of limitations for collection. If the creditors can't sue you for the money, the worst thing they can do is keep sending information about the bad debts to your credit report. Most negative data can remain on a report for seven years. However, the statute for lawsuits may be much longer, so check what it is for your state.

The second is that you have nothing (no assets) to claim and probably won't in the future. Even if creditors were able to sue you, they would not be able to take anything from you with wage garnishments, liens and levies.

In the event you fit the above profiles, you might want to send your creditors cease-and-desist letters. Upon receipt, they would have only two options: Sue or stop contacting you. If they can't take you to court since the statute of limitations is up or it wouldn't help them even if they do, they likely won't pursue you.

There are other options, though, Pete. Here are a few:

  • Arrange lower payments. Rather than run away from your creditors, try to enter into an affordable installment agreement.
  • Settle the debts. If you can scrape up some cash, you may be able to pay less than you owe and be done with it.
  • Visit a credit counseling agency. Discuss debt repayment plans — you may qualify.
  • Borrow money. Maybe you have a close friend or family member who is willing to help you out, and you can owe them instead.
  • Sell assets. Get rid of anything you don't need, and apply the proceeds to your debt.
  • Increase income and reduce expenses. Maybe you can get a second job or live close to the bone so you can pay your creditors off.

The key is to explore all viable ways to deal with your debt. Will the decision be easy? Probably not. But by process of elimination, you should be able to whittle them down to the best choice.

Got a question for Erica? Send her an email.