I have three credit cards with debts of $30,000 incurred in the stock market. After the crash, this is what I ended up with. I cannot afford to keep making payments on these cards. I have a house with 50 percent equity in it and can't borrow any more. If I file for Chapter 13 bankruptcy, how do you think I will make out? – Tom
Is 13 your lucky number? Well, Chapter 13 bankruptcy — a court-supervised arrangement where you have three to five years to deal with debts — is certainly is something to consider. Yet, while it has advantages, it also has serious downsides. To help you decide, here are a few of the most notable pros and cons:
- Bundled balances: You can combine everything, from the credit card liabilities, to tax debt, to legal fees, into a single payment. Such simplification can help keep you organized and focused while attacking your debt.
- Protection of property: If you own assets that you'd be forced to forfeit in a monetary judgment or a Chapter 7, you can preserve them with the 13.
- Ability to offset repossessions: When you pay through the courts, as you do with a Chapter 13 bankruptcy, you may restructure secured loans, which can stop vehicle repossessions and home foreclosure proceedings.
- Ability to discharge (some) debts: If there's an unsecured balance (such as credit card debt) left over at the end of the repayment period, you'll be able to walk away from it.
- Trustee costs: Chapter 13 bankruptcy can be pricey. You'll have to pay a professional to manage your case, which can be up to 10 percent of the amount you send toward your debt repayments.
- Income requirements: You may only use Chapter 13 if you have the means to pay — not just now but over the long term.
- Financial restrictions: To qualify, you may have to adjust your lifestyle to a more meager one. And if you get bonuses or a higher paying job, you'll probably have to reroute the extra funds to what you owe.
- Credit damage: The bankruptcy notation will remain on your credit report for seven years.
If this process sounds appealing, talk to an attorney. However, if the disadvantages are giving you pause, that's OK too. There are other viable options worth exploring.
For example, you might be able to file Chapter 7 bankruptcy instead. It might work better for you, especially if your income is very limited and you own no at-risk property. In exchange for leaving your credit card balances (and other unsecured debts you might have) behind, the bankruptcy notation will stick to your credit report for 10 long years.
Or you may use a credit counseling agency's debt repayment program. Credit counseling agencies are nonprofit organizations that help people with financial problems. After reviewing your budget with a counselor, you may be able to use the agency's debt repayment program. If so, you would send one payment to the agency, which will distribute it to your creditors for a small administrative fee.
The upside is that credit counseling agencies can sometimes reduce your interest rates. For instance, if your current credit card interest rates are 29 percent, and you were to send $1,050 per month for four years on your own, you'd pay $21,500 in finance charges. But if you can get the rate shaved down to 11 percent, the payment would drop to $760 per month over those four years, and the finance charges would be $7,400. Counseling is free, so check it out.
Of course, you can continue to deal with the debts on your own. Maybe you can sell some of your belongings and apply the proceeds to the balances. At that point, the payments could be easier. Perhaps you can slim down your spending or increase your earnings to expedite debt elimination.
I know paying down debt is tough, but do what it takes to pay before declaring bankruptcy. After all, it's not the credit issuers' fault that you played the market and lost.