We all know that debt is a reality for almost everybody, but it doesn’t define your financial future.
Maybe you made bad choices like our maverick. Even though she had the money, she neglected to pay her credit card bill and ended up with debt and bad credit. Just imagine being debt-free. Your financial diva is challenging you to live in the present, pay off your debt, and take control of your financial health.
Ask yourself the following questions:
1. How do you feel about your outstanding obligations?
2. Can you only afford to make minimum payments on your credit cards?
3. Do you worry about finding the money to make monthly car payments?
4. Do you borrow money to pay off old debts?
5. Have you used a home equity loan to refinance credit card debts, then run up new revolving balances on your cards?
If you said yes to any of these questions, then it’s time to rewrite a new story that tells your adventure of becoming debt-free. Visualize yourself actually living to your full potential with an unlimited amount of success, happiness, and wealth.
Now, let’s drill down to focus on the details. Take a look at how much money you take in and how much you spend. Can you make ends meet on the basics: housing, food, healthcare, and insurance?
There are two types of debt: Secured and Unsecured.
Unsecured debt is not tied to any particular assets, such as student loans, credit card debts, and medical care bills. If you stop paying your credit card bills or any unsecured debt, the interest and late payment fees continue to accumulate.
Secured debt is tied to an asset, like a car for a car loan or a house for a mortgage. If you stop making payments on your car, the lender can repossess the car. If your car is repossessed, you still have to pay the balance on your loan, plus towing and storage costs. The creditor can sell the car to offset the amount owed. If you stop making payments on your mortgage, the lender can foreclose on your house.
When you are struggling with a significant amount of debt that you cannot repay, you have the option of filing bankruptcy. Bankruptcy is a legal process that involves seeking legal assistance from the U.S. Federal Court to discharge some of your debts so that you get a fresh start financially.
Declaring bankruptcy is a serious matter with long-lasting consequences including lowering your credit score, which causes lenders to charge you a higher interest rate. A bankruptcy also stays in your credit history for up to ten years.
Whether you’re considering bankruptcy or would like to learn more about it, here are 14 key factors to consider.
1.There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 allows the filer to walk away from debts entirely. This option is used by those whose debts are so high or income so low that after basic expenses they don’t have the money for a payment plan. On the other hand, Chapter 13 allows the filer to draft a plan to repay all or part of the debts over three to five years and can also stall a foreclosure long enough for one to get re-employed.
2. Consumers don’t use bankruptcy frivolously. According to Henry Somner, former president of the National Association of Consumer Bankruptcy Attorneys, he says that most people “turn to bankruptcy when they have major life events that significantly reduce their income, increase their bills or both”, with the most common reasons being divorce, unemployment, and medical bills. In regards to medical bills, he claims that “50 to 60 percent of cases have medical problems present.”
Filing bankruptcy also halts, at least temporarily, collection attempts and foreclosures. If you’re unemployed or recently re-employed but facing foreclosure due to missed payments, Chapter 13 can help you save your home as long as you can afford your mortgage payments on your salary (or expected salary).
3. Where you live matters. When it comes to which assets you can keep in bankruptcy, rules vary widely by state. In addition, income and expense limits used for determining whether you qualify for a Chapter 7 will vary by location. Also attorney’s fees and filing fees will vary.
4. You get to keep your assets, sort of. Filing for bankruptcy isn’t as drastic as what you see on television. For the most part, you’ll most likely get keep your personal property, such as clothes, electronics, household furnishings, and other exempt assets.
Furthermore, you can sometimes retain larger assets, such as cars and the family home depending on your state laws, the type of bankruptcy you file, and your finances.
5. The two types of bankruptcy are two very different tools. Like any major financial decision, you need to gather information. For example, a Chapter 13 might be your best option if you were out of work and got behind on the house payments but can now meet your mortgage. However, if you don’t own a home but are struggling with medical bills, then Chapter 7 might be a better choice.
When trying to determine which type of bankruptcy to file for, write down the assets that are important to you and what you need to get from your bankruptcy. When you talk with an attorney, go through the list and find out how the two types of bankruptcy (combined with the laws in your state) would impact each item and how to best go about it.
6. You have to qualify for a Chapter 7. In order to file this type of bankruptcy, consumers must show through income (if they are below the state median) or through both income and expenses (if they are above the state median) that they can’t repay their debts. According to Somner, filers who do need Chapter 7 are having no problems qualifying since bankruptcy is often a last resort.
7. Bankruptcy is not cheap. Costs vary depending on your attorney and location. But in general, a Chapter 7 can run from $1,500 to $2,500, while a Chapter 13 can typically run from $2,000 to $4,000.
For example, a Chapter 13 includes bankruptcy costs in your plan and you can pay them over three to five years, but that’s not an option with a Chapter 7.
In addition, initial consultations are usually free, so don’t be afraid to interview several attorneys and let them know price is a factor.
8. You may be able to get free or low-cost legal help. Several law firms may have discount programs you can use. If not, the bar association might have a list of firms that do low-cost or pro bono work and your local legal aid office may be able to help as well. Some cities, like Philadelphia, have organizations such as the Consumer Bankruptcy Assistance Project that help low-income consumers.
Pro tip: Avoid nonlawyers who say they can help with a bankruptcy. You’ll end up losing more money instead.
9. Bankruptcy goes on your credit history. It’s pretty well known that filing for bankruptcy will remain in your credit history for about 10 years. What’s not so well known, on the other hand is that the older the bankruptcy, the less power it has to scare lenders and impact your credit score.
10. It may not make your credit any worse. If you’ve had financial problems (chronic late and missed payments, charge-offs, etc.), it most likely will not have much of an effect. On an even brighter note, you can still improve your credit a year or so after filing.
11. A bankruptcy doesn’t protect joint account holders. A bankruptcy dissolves your obligation to a creditor. If anyone else is also on the hook for one of your debts, such as a joint account holder or co-signer, your bankruptcy makes that bill his or hers alone.
Pro tip: Before you finalize a divorce, pay off bills or have the obligations transferred into the name of one party or the other.
12. It’s public. One of the biggest bankruptcy misconceptions is that most people believe that filing will ensure privacy, but that’s not the case. According to Jack Williams, co-author of “Tax Aspects of Bankruptcy Law and Practice, literally anyone can look up your financial situation.
On the plus side, unless you’re famous, you probably don’t have to worry about this at all.
13. You’ll have to go to class. Before you file, you’ll be required to take a 90-minute credit counseling class. In addition, before your bankruptcy is officially concluded, you’ll also have to take a second, two-hour session. Thanks to today’s technology, you have the option to attend by phone or online if you don’t want to take it in person.
If you’re receiving free or discounted legal services, or living on Social Security disability payments, you can get the fees waived.
Pro tip: Aim to spend no more than $50 per class.
14. It can pay to be proactive. If you’re considering bankruptcy, it pays to get advice early, especially if you’re getting notices of foreclosure or lawsuits.
Having that information early can help you make strategic decisions. For instance, many experts recommend waiting until the situation causing your financial crisis (job loss, medical problem) is over or at least stabilized before you file, so that you don’t just rack up more bills. In some situations, consumers need the immediate protection from foreclosure or collection that bankruptcy provides. Knowing your options early can help you better navigate your situation.
For more information, you can find my book on Amazon — click here to purchase the Kindle version.