Declaring bankruptcy is regularly 'advertised' as offering people a fresh start. In the 12-months ending September 2009, a total of 1,344,095 opted to petition for bankruptcy. Filing for bankruptcy should never be seen as an easy way out because it isn't. Filing chapter 7 will show on a personal credit report for the next 10 years. This not only makes borrowing money more difficult, not to mention expensive, it also means that certain forms of employment - financial services, law and certain government positions - will no longer be an option. It is important to take into account personal circumstances as well as considering whether other alternatives to bankruptcy are more appropriate.
Declaring Bankruptcy to Eliminate Serious Unsecured Debts
It may be appropriate to petition for bankruptcy to clear debts, including unpaid credit card bills, medical debt, repossession deficiencies and unsecured loans. In order to qualify for chapter 7, income will need to be below the state median. If this isn't the case, filing under chapter 13 is still a viable option, particularly if the client has non-exempt assets.
Filing for bankruptcy won't eliminate student loans, car finance or any loans secured against the property. It also isn't the right option to write-off smaller debts because bankruptcy attorney fees amount to $2,000 to $3,000 . A debt management plan is better for dealing with more modest levels of unsecured personal debt.
Eliminating Debt with No Disposable Income Available
It is possible to become free from debt in as little as 4 months. No creditor is legally able to contact the debtor during this stage of proceedings due to an 'automatic stay' on any legal action to recover the outstanding debt. This means that there will be nobody knocking at the door or unwelcome telephone calls from collection agencies.
Although a debt settlement plan offers a bankruptcy alternative for those who are able to offer creditors a monthly repayment, this isn't always possible for unemployed people. A petition for bankruptcy under chapter 7 is a way of writing-off debt without the need for a repayment plan. The only costs involved are bankruptcy attorney fees and a counseling session.
Petition for Bankruptcy to Prevent Mortgage Foreclosure
Despite the fact that secured debt cannot be legally eliminated by filing bankruptcy, an 'automatic stay' on proceedings will be granted by the court and this will stop foreclosure from taking place. Although it won't stop a property from being repossessed indefinitely.
Declaring bankruptcy gives the insolvent time to construct a suitable repayment plan to pay-off the arrears over a defined period of time. There are alternatives, such as a short sale for fair market value and performing a loan modification. These options may be more appropriate if that person doesn't have any other eligible unsecured debts.
Possible Alternatives to Bankruptcy
If sufficient disposable income is available, it may be possible to avoid declaring bankruptcy. It is important to appreciate that the same court protection from creditors won't be enjoyed. The most common bankruptcy alternative is a debt settlement program. This involves a reduction to the principal of up to 50% and an affordable monthly payment to an intermediary for the next 12 to 36 months. A debt-free solution will show on a personal credit report for the next 7 years.
Sources
"Bankruptcy statistics." U.S. Courts.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
Comments