American families are facing and filing bankruptcy today more than at any time since the newest bankruptcy law was passed in 2005. U.S. consumers made 675,351 bankruptcy filings in the first half of 2009, a 36.5 percent increase from a year ago, according to the American Bankruptcy Institute. This is a rate of over 100,000 personal bankruptcies every month, with no end in sight.
Despite what you read, most bankruptcies are not just a matter of people spending more than they can afford or living beyond their means. Most bankruptcies are a direct result of medical bills, illness or job loss. Most people filing bankruptcy were able to deal with their bills and expenses just fine until they were hit by unexpected personal disasters.
If, due to circumstances beyond your control, you are facing debts with no way you can see to pay them, there are three basic approaches you can take: (1) do nothing, and deal with the bill collectors; (2) negotiate deals with the creditors, either directly or through a credit counseling service; or (3) file bankruptcy. Here are the pros and cons of all three:
Do Nothing. This is not as hopeless as it sounds, especially if you have no assets that creditors can get and little or no income. Some of your creditors will write off your debts if they look uncollectible and leave you alone. Others may pursue and harass you, but they will not get anywhere if there is nothing to get. Eventually, some creditors will file lawsuits and get judgments. With judgments, they can go after your wages and your assets, but state laws exempt basic household necessities and most of your wages from most collection activities. If you have no assets except basic necessities, can live without part of your salary, and, most important, you are very thick-skinned, then you can seriously consider doing nothing about your debts.
Negotiate Deals. Unsecured creditors -- those without mortgages or liens -- often will negotiate payment schedules and reduced interest rates with people who can't make their regular payments. You can negotiate these arrangements directly or work through a credit counseling service or debt consolidation company. They negotiate terms with your unsecured creditors, take a single monthly payment from you, and make the payments for you. Credit counseling services charge for their services, and you have to be careful not to end up paying exorbitant fees. Secured creditors, who can foreclose on your house or repossess your car, have to be dealt with separately. Deal negotiation may work if you can keep making the payments. Usually, though, creditors will not agree to any deal better than you could get through bankruptcy.
File Bankruptcy. There are two main kinds of personal bankruptcies. About 70% are Chapter 7 liquidations and 30% are Chapter 13 debt adjustments. A "means test," measuring your ability to pay, determines which chapter applies. Under Chapter 7, a court-appointed trustee liquidates the debtor's assets, if any, and makes distributions to creditors, but the debtor may retain certain exempt property. Secured creditors are usually allowed to reposess their security, typically a house or car. The individual Chapter 7 debtor normally receives a discharge that is a release from liability on all dischargeable debts. Under Chapter 13, designed for individuals with regular sources of income, the individual proposes a "plan" to repay creditors over a three to five year period. Chapter 13 is available to most individuals who are precluded from Chapter 7 by the means test, and is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house. The debtor must complete the payments required under the plan before receiving a discharge. Only about 33% of Chapter 13 plans are completed successfully.
Filing bankruptcy usually has advantages. Learn more at Your Bankruptcy Information Website, at here4bankruptcy.com. It is court supervised and well defined. There are no hidden traps or unexpected expenses. The main hazards are nondischargeable debts, which include most taxes and several other categories. With any significant debts other than credit cards and other unsecured bills, it is usually important to get the advice of a bankruptcy lawyer before deciding whether to file bankruptcy or take another approach.
