These tough financial times are difficult for a lot of Americans. Some may have to make hard choices when it comes to paying their bills. Historically, debtors who failed to pay their debts could be sent to prison. Today, we have other solutions, including a uniform system of bankruptcy laws that provides relief and a fresh start to many individuals who are in financial trouble.
Although bankruptcy is one of the most important alternatives available for relieving financial distress, it is a serious legal procedure with long-term consequences. Before considering bankruptcy, you first should learn about how bankruptcy works, explore other options with a credit counselor, and only then decide which course of action is best for you.
Many people in financial trouble can improve their situations simply by contacting and negotiating directly with their creditors. Others may get help from reputable local financial counseling programs or reputable consumer credit counseling services that have experience negotiating with creditors and establishing repayment plans. For example, a creditor might be willing to settle its claim in exchange for a partial cash payment, or it might be willing to stretch out the term of its loan and reduce the size of the payments you owe each month. By allowing you to pay off your debt by making smaller payments over a longer period of time, the creditor would eventually receive full payment. If you pursue this option, however, make sure you don't end up paying too much interest!
You should also determine if you are judgment proof, in which case you may not need to file for bankruptcy to protect your property and wages. Judgment proof simply means that you have so little money, income, and property that you would be unable to pay a court judgment entered against you even without filing for bankruptcy. Under state and federal exemption laws, creditors are not allowed to seize certain income - such as Social Security income, wages below certain levels, and certain personal property - from judgment-proof debtors. If there's no point in creditors going after you in court, there may be less reason for you to declare bankruptcy. If you believe that you may be judgment proof, discuss your situation with a lawyer or a credit counselor.
Keep in mind, however, that if you don't declare bankruptcy, you won't be eligible for certain protections that bankruptcy can provide, including possibly preventing foreclosure on your home, stopping a repossession of your car, and preventing further collection efforts. Without bankruptcy protection, creditors often will be able to enforce court judgments against you if your financial situation one day improves.
Steps to Take
If you are struggling to pay your bills and handle your debt, there are a variety of steps you should take before turning to bankruptcy.
- Learn What You Owe. A good first step is to assess your debt level as compared to your income. Before you can make a plan about your financial future, you need to determine what debts you owe and whether you can live within a strict budget. Many people can reduce their debt significantly simply by living within a self-imposed budget and not spending money on unnecessary items. For others, bankruptcy might be the only realistic option. But you can't make this decision until you figure out and carefully examine your income and debt.
- Contact Your Creditors. If you are behind on your payments, debt collectors for each of your creditors may already be calling or writing you. You might be more successful if you phone each creditor, ask for the credit department, explain your sincere intent to repay the account, and express your need to stretch out the number of monthly payments and reduce the dollar amount of each payment. Make sure you always ask for and write down the name of each person you talk with.
- Consolidating Debt. Occasionally, you may buy time and avoid bankruptcy by consolidating your debts - that is, by taking out a big loan to payoff a number of your smaller debts. However, the primary danger of consolidation is that you may then find it very easy to use your credit cards to borrow more money, which could leave you with even more total debt and no additional income to make the monthly payments. Indeed, if you have taken a second mortgage on your home to get a consolidation loan, failure to make payments on the loan could put you at risk for losing your home. You should also thoroughly analyze the interest rates and up-front fees on such consolidation loans. Make sure the loan's interest rate is lower than that of your credit cards.
If you ultimately decide to seek bankruptcy relief, make sure you hire a lawyer who is familiar with the federal bankruptcy laws and the laws applicable in your state, and who is staying abreast of any recent changes in the law. Even if you aren't ready to declare bankruptcy and are merely interested in looking at your options, you should consider working with an attorney. Many people are intimidated by the legal system or lawyers, but you shouldn't be. A good lawyer can be your best advocate as you navigate a most difficult time for you and your family.