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For Card Debt, Bankruptcy is All or Nothing

Erica Sandberg

January 3, 2013

QDear Erica,

My husband and I have maxed-out credit cards and several others. How do we get this mess fixed? I have thought about filing for bankruptcy on just the two maxed-out cards. Is that possible? All our money is going to credit cards. What should we do? — Gina

AHi Gina,

No, if you were to file for Chapter 7 bankruptcy protection (the kind that absolves you of unsecured debt), you would not be able to pick and choose which of your debts get absolved. Unless it’s a personal loan, such as money you owe to a friend or relative, picking who gets paid and who doesn’t is not permitted as it wouldn’t be fair to the creditors. Each must be treated equally.Ask Erica

If you do have any cards that don’t have balances, do what you can to keep them at zero. If you have some cards that have low balances, pay them off completely before filing. Why? Because any cards with balances will likely get closed as a result of your bankruptcy. While you may be able to borrow again soon after the bankruptcy process has been completed, the terms will almost certainly be poor. So, those other cards could be your credit lifeline.

Now, on to your big question: How do you clean up the mess you and your husband are in now? Bankruptcy is one way, but it has to be right for you and your situation. The courts may not even accept your petition. If your current monthly income is more than the median income for a household of your size in your state, you have to pass a “means test” to ensure that you truly do not have the financial capacity to pay your creditors.

Essentially what you’ll need to do (or what your lawyer will do) is deduct your basic monthly expenses from your current monthly income. The amount left over is your monthly disposable income, and if the number is too high, Chapter 7 bankruptcy won’t be for you. If you earn less than your state’s median income, you automatically pass, but bankruptcy still may not be the best course of action.

Now, I do think bankruptcy can be wonderful. I really believe that it can be a fantastic way for those who genuinely can’t satisfy their debts to get back on their feet. Once some or all of their obligations have been forgiven, they can resume paying their essential expenses.

However, if you have any way to pay and fix your mess, you should. That may mean taking drastic action, including selling stuff you own and applying the proceeds to the debts, drastically cutting spending and working longer and harder to earn more. Why? It’s the right thing to do. When you borrowed the money you made a promise to repay it.

If you absolutely cannot pay your debts, then consider filing. There are repercussions, of course, such as a damaged credit score. Those numbers will sink when you go down the bankruptcy road. Then again, chances are high that your scores are pretty low now anyway. At least a few of your cards are maxed out, and if you’ve skipped payments on top of that, your scores are definitely scraping the bottom.

So the question is, can you earn more and cut down spending? If the answer is yes, that’s how you can resolve your financial problems.

Another option is to go to a credit counseling organization. These nonprofit agencies exist for people like you who don’t know which direction is best. The counselor will examine your assets, income, expenses and obligations and then come up with a plan of action specifically for you and your husband. It may include a debt repayment arrangement, in which you make payments through the agency in exchange for lowered interest rates so more of your payment goes toward the principle. Or, your counselor may suggest bankruptcy or something else. Who knows? You’ve got to go to find out. Appointments are free, so you’ve got nothing to lose.

To find a credit counselor near you, visit the National Foundation for Credit Counselors or the Association of Independent Consumer Credit Counseling Agencies.

I wish you the best.