If you have more debt than you can possibly ever repay, then you are in an unsustainable situation and need to consider your options and whether bankruptcy is right for you. First, you need to consider whether to continue making the minimum payments on your bills. It will feel strange when you first stop making those payments, but many of my clients find that once they take that step, they wish they had done so a lot sooner.
Now if you can pay your bills, you should. But often the only reason we keep making these minimum payments is to keep our credit score. At some point, you need to determine how much -- in real dollars -- your credit is worth. For most people, it really isn't very much. Sometimes -- like if paying your minimum credit payments takes food off your table -- it is best just to let it go.
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If you don't have any assets that you fear losing, and if you earn less than the median income for a family your size, then Chapter 7 is often a quick, easy solution - a flush of your debts and your problems. We will always try to explore alternatives short of bankruptcy with you, but for lots of people that I see, the choice is clear-cut.
Chapter 7 won't help you if you are behind on the payments for your house or car and you want to keep them. If you are behind, you can be protected from the debt in Chapter 7 but the lender still gets the house or car back. That isn't always what you want. You can file Chapter 13 instead, which involves going on a payment plan to pay back part of what you owe. You can catch up your missed payments over time and pay a small amount of money to the rest of your creditors. Chapter 13 is also appropriate for people who make too much money or have too many assets to conveniently qualify for Chapter 7.
We talk about Chapter 12 only because we attorneys have to as part of explaining bankruptcy. Chapter 12 is for family farmers. In 13 years of practice, I have never met a family farmer who needed to file bankruptcy and I have only heard of one such case.
Chapter 11 is actually used quite often for people or businesses that need to restructure their debt, their businesses, or their lives. It is very expensive but offers great flexibility. Consumers often become Chapter 11 candidates because they owe too much money to qualify for Chapter 13 but are behind in mortgage payments on a property they want to keep, and Chapter 7 won't help.
I talk a lot about bankruptcy because it is the best option for a lot of people that I meet. But you should keep in mind that you don't have to file bankruptcy. You could instead save your nickels and either pay or settle your debts. I have had success in negotiating favorable debt settlements for my clients. While you can settle your own debts, you may find that an attorney is worth the money to act as your mouthpiece because of the money he can save you. If you choose to settle debts, NEVER offer to go on a payment plan with a creditor. I universally advise clients to either ignore a creditor or offer a lump sum settlement. If you don't have a lump sum, save up money and then call. If saving your money is impossible, then you should probably consider bankruptcy. Remember that the lender wants you on a payment plan because the longer you pay on a debt that you have no hope of paying back, the more money they make and the more TV commercials they get to run.
You should also know that if you settle a debt you will have to pay income tax on what your creditor writes off. In other words, if you settle a $40,000 debt for $10,000, you can expect $30,000 to be added to your income on your 1040 next year. Lots of people come to me thinking that they want to settle their debts but immediately switch gears and look to bankruptcy once they learn about the tax burden of debt settlement.
This is not legal advice. If you think it is necessary, talk to an attorney in your jurisdiction for a fact-specific analysis of your situation.
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