People can get in over their heads financially for a lot of reasons: large medical bills not covered by insurance, loss of a job, marital problems or divorce. Recently, some people have been caught in the mortgage crisis, and found themselves unable to keep up. And let’s be honest, some people simply take on too much debt, living on credit instead of living within their means. Any of these events alone can cause hardship, but combine two or more, and you may have a perfect storm leading to insolvency.
Filing for bankruptcy is one option for getting out from under a mountain of debt, but it is not a quick fix. Before you decide that bankruptcy is your only solution, consider some points on the down-side:
- Child support payments, taxes, and student loan payments must be met, even in bankruptcy.
- Bankruptcy will affect your credit rating long-term, affecting your ability to get traditional loans.
- While some lenders will make loans despite a bankruptcy, those loans probably come with higher interest rates, and you risk getting in over your head again. And if you do, those lenders can garnishee your wages, because new debts are not protected from creditors.
- Many employers now run credit reports on prospective employees, and applicants who appear to be poor credit risks may have a harder time finding employment.
The Federal bankruptcy code was re-written in 2005, and one of the new rules requires filers to get credit counseling within six months of filing for bankruptcy. You can locate an approved, non-profit credit counseling agency at http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm.
In the United States, the Federal government has jurisdiction over bankruptcy courts; however, state laws also play a major role in bankruptcy court, so what’s acceptable in one state may be different in another. Consult an attorney for help understanding the laws in your state. There are different types of bankruptcy. Those that protect individuals include:
Chapter 7 – Also known as a “straight bankruptcy,” wherein all non-exempt assets are surrendered to a bankruptcy trustee, who converts them to cash to pay creditors. State laws vary in regard to property deemed exempt or non-exempt. Chapter 7 bankruptcy stays on your credit report for 10 years.
Chapter 13 – Also known as a “wage earner’s plan,” wherein the debtor agrees to pay off debts within a certain time period, usually three to five years. Filing for Chapter 13 can stop foreclosure proceedings, roll secured debts into a payment plan, and protect co-signers on consumer loans. A court-appointed trustee will receive payments from the debtor (usually through payroll deduction) and repays creditors according to a payment plan. Chapter 13 bankruptcy stays on your credit report for seven years.
Chapter 11 – Also known as a “corporate bankruptcy,” is used by business to seek protection from creditors while they reorganize, rather than go out of business. Large, public corporations as well as mom-and-pop corporations can file for Chapter 11 protection.
Chapter 12 – This is used by family farmers and fishermen to set up a repayment plan, usually within three to five years. It is similar to Chapter 13 and Chapter 11, with specific rules to meet the needs of family farmers or fishermen.
Things to Know When Considering Bankruptcy:
Bankruptcy isn't something you'll want to do alone or head into without assistance. Be sure to seek as many points of view as possible, starting with your investment advisors.
Several Web sites, including FreeAdvice.com, can provide background information for those with financial difficulties.
WSLife.com includes many helpful calculators and planners, including the interactive Budget Calculator Tool.
Western & Southern Life does not provide tax or legal advice. Please contact your tax or legal advisor regarding your situation.