Filing for bankruptcy and credit counseling are the two main solutions for serious debt problems. When you're seeking to escape from debt, it's important to learn as much as possible about the debt relief programs that are available to you. Without an understanding of your personal circumstances and the benefits of each debt-free solution, it's not possible to make an informed decision regarding how to proceed.
What Unsecured Debts Can I Discharge?
Most forms of unsecured debt can be eliminated through non profit debt counseling services or personal bankruptcy. However, section 523(a) of the bankruptcy code excludes certain debts from inclusion in your agreement. These include child support, alimony payments, student loans, tax liens, fines from government departments, fraud debt and money you owe due to injury lawsuits.
Should I File for Bankruptcy to Escape from Debt?
Known as liquidation bankruptcy, you're able to write off most unsecured debts in just 4 months. In the 12 months ending 31 December 2010, a total of 1,100,116 people chose to file Chapter 7. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act was introduced to prevent people from discharging debt when they're able to offer a full or partial payment to creditors.
You'll need to undergo pre-bankruptcy debt counseling and must attend a debtor education course after you've filed Chapter 7. These courses will cost you up to $100 each. An approved U.S. Trustee Program certificate of completion will need to be presented to the court before your debts can be discharged. A list of approved debt counseling agencies can be found at the U.S. Department of Justice.
Am I Eligible to File for Chapter 7 Bankruptcy?
- You'll need to pass a Chapter 7 means test. The rules can be quite involved, but you're eligible provided that your income is below the median for your state in the 6 months prior to filing.
- Non-exempt assets, such as a holiday home, valuable collection or luxury vehicle, will be sold by a court-appointed trustee. You can file Chapter 13 to protect your assets from creditors.
- You mustn't have filed Chapter 7 twice in any 8-year period.
Consumer Credit Assistance as a Bankruptcy Alternative
If you're looking for an alternative to bankruptcy, turn to a nonprofit debt counseling service. After you've undergone a budgetary analysis, it will be decided whether sufficient savings can be realized or whether you'll need to proceed with a debt relief program. Rather than paying the amount specified in your credit agreement, you'll make a payment that's based on affordability.
Consumer credit management services can prove expensive, and it'll take a lot longer to pay off the debt. The agreement isn't legally binding and can be cancelled by either party at any time. Even when the agreement is in place, creditors can still contact you for repayment. You can refer your creditors to your intermediary, but it's still a nuisance. Bankruptcy makes it illegal for creditors to contact you.
Bankruptcy or Credit Counseling?
In an article for MSN Money on the 22 December called "Is credit counseling right for you?", Liz Pulliam-Weston stated: "Credit counseling is designed to help you avoid bankruptcy or debt settlement, but bankruptcy in particular can be a faster way to wipe out your debt and give you a fresh start." If you have smaller debts, credit card debt relief could prove to be a more viable option.
If you have serious debt problems and qualify under the means test, Chapter 7 will enable you to become free from debt more quickly. However, it will show on your credit report for the next 10 years. Consumer credit assistance, in the form of a debt management plan, won't affect your credit score as much and will be held by credit reference agencies for just 7 years.
Sources
- Pulliam-Weston, Liz. (22 December, 2010). "Is credit counseling right for you?" MSN Money
- "Business and Non-business Cases, by Chapter of the Bankruptcy Code." US Bankruptcy Courts.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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