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The Dollar Stretcher
by Gary Foreman
Dear Dollar Stretcher,
My husband and I have been with a credit counseling service for two years. We started off with $22,000 in debt and are now down to $15,000 while making monthly payments that were less than without the service. Now our student loans are coming due (two masters degrees and two kids later) which are about $100,000. We are considering bankruptcy to stop paying on the old debt and get prepared for the student loan payments. We have been trying for two years and feel as if we have gone nowhere and want to declare bankruptcy to get back on our feet.
Kay in Southern California
Kay isn't the only one contemplating bankruptcy. For the 12 months ending June, 1999 there were nearly 1.4 million bankruptcy filings in the United States. It's estimated that bankruptcies cost the American economy $44 billion in 1997.
Before we try to answer Kay's question, let's take a minute to learn a little about bankruptcy. There are two kinds of personal bankruptcy. People usually get to choose between Chapter 7 (most assets are sold to pay off debts and the remaining debts are written off) and Chapter 13 (where their debts are renegotiated and paid off). About 70% of bankruptcy filings were for Chapter 7. The process takes about 3 months from filing to final discharge of debts.
People filing for Chapter 7 are allowed to keep 'exempt' property. Each state determines what is exempt. Often it includes your home, auto, clothes and any tools of your trade. However, the fact that you're allowed to keep your home or auto doesn't mean that you can stop paying for them. If a loan was secured by real property (i.e. your house or car) then you must continue to make your payments if you expect to keep those items.
Before we take a look at some of the things that Kay will want to consider we need to point out that this column cannot take the place of good legal advice. Each state is different and all we hope to do is to provide some information that can start you towards a good decision.
Before filing for Chapter 7 you need to answer two questions. Will bankruptcy discharge enough of your debts to bring relief? Will you have to give up property that you really want to keep?
Remember that certain taxes, child support, alimony and most student loans will not go away. Also remember that in Chapter 7 you may be forced to give up collectibles, family heirlooms, investments or a second car/truck.
It's important for a person to total their assets and liabilities before they consider bankruptcy. Just because you file for a Chapter 7 bankruptcy doesn't mean that you'll get it. If the judge sees that your income exceeds your expenses, they'll probably require you to file for Chapter 13. In that case the debtor keeps all of their property, but will continue to make payments on all of their debts based on a plan that the court approves.
For some people a Chapter 13 filing is better. Chapter 13 can prevent foreclosure on a home or car. The court approves a repayment plan and can force the lender to accept that plan. If you are behind in your car or mortgage payments Chapter 13 could be a better choice than Chapter 7.
Also consider alternatives to bankruptcy. Before taking such a drastic step you should contact your creditors to see if they're willing to adjust the terms of your credit agreement. You might also want to contact one of the non-profit credit counseling services. Often they're able to work out terms with your creditors that you couldn't negotiate yourself.
One problem with bankruptcy is that it is one of the biggest negatives that you can have on your credit history. Credit agencies can report Chapter 7 bankruptcies for 10 years. Chapter 13 bankruptcies will stay on your record for seven years.
Lenders are allowed to consider a bankruptcy as part of their decision whether to extend credit. Some will be willing to grant credit right away while others may want to wait for a number of years. Many filers find it almost impossible to obtain a mortgage or unsecured credit card for years. And when they do find a lender, they will pay a higher interest rate on the money they borrow.
And it's not only your credit history that will suffer. Federal law allows landlords and employers to consider bankruptcy. It is legal to refuse to rent or hire or promote someone because they've declared bankruptcy. Other people come through bankruptcy with less disruption. These people tend to be more secure in their jobs and homes.
After a bankruptcy, the debtor will earn a good credit rating by demonstrating an ability to use and repay debt wisely. Often a good start is by using (and paying off) a secured credit card.
One final thought for Kay. She does need to be aware of new proposals in congress that would make it more difficult to file for bankruptcy. It would also mean that more debts would survive the bankruptcy proceeding and still need to be paid by creditors. One recent report estimated that 15% of Chapter 7 filers would be effected by the proposed changes in the law.
Should Kay and her husband consider bankruptcy? Clearly we don't have nearly enough information here to make an assessment. Certainly they face a very large debt. But they've already eliminated about one third of their non-student loan debt. And the school loans might survive a bankruptcy filing. It's also possible that the court will find that their income exceeds expenses and that they can only choose a Chapter 13 filing. So they'll need to study their situation before making a decision. Hopefully their choice will take them to a position of being in control of their debts.
Gary Foreman is the Editor of The Dollar Stretcher
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