Facing a mountain of debt is never easy under any circumstances. But if you lost your job due to layoffs or your company decided it was more cost effective to more your job to another country, then your situation could become dire. If you delay or ignore the calls to pay your creditors, you risk court judgments that could result in seizure of your bank accounts, vehicle, or other possessions. So how do you find debt relief?
The two main options for settling your debts under any circumstances is bankruptcy or debt settlement. Before you decide on which course of action, you should carefully consider the consequences of either option, the process, and the impact on your credit.
You might consider debt negotiation as a way of saving money. If you do not wish to do it yourself, there are numerous debt negotiation companies willing to talk to your creditors to reduce your overall credit card debt. The process usually works by having you first establish a savings account with the company and fund it on a monthly basis. Once it reaches a certain level, the company will begin to negotiate with your individual debtors.
There are major issues with having a debt settlement company deal with your debts:
- There is no guarantee the company will settle all the debts or for a manageable amount
- Interest and late penalties will still accumulate on your arrearages while you fund your savings account
- Creditors will continue to report to the credit bureaus about your late payments–these remain on your credit reports for 7-years and can result in lower credit scores
- The fees you pay the company are a percentage of the settled debt or eliminated debt, which may not be much less than the original debt once all fees and the reduced debt are paid off
- If you set up a monthly account, you likely pay a monthly fee to maintain it
- Any debt forgiven has tax consequences and is considered taxable income
- Your mortgage or car loan company will not agree to a reduction in payments
- If you are unemployed, you will need to focus on providing the necessities: housing, utilities, food, clothing, transportation… Don’t pay a bill collector before your family is fed.
You can attempt to negotiate yourself by agreeing to reduced amounts in return for a lump sum payment, if you can afford to do so, although you still face tax consequences and not all creditors are inclined to reduce the debt amount or by a significant amount.
If Debt Negotiation is not right for you then you should consider bankruptcy as an option.
As a consumer, you generally have two choices regarding the type of bankruptcy you may file: chapter 7 and chapter 13. To file for either type of bankruptcy, you must first meet the income requirements. There are debt limits for chapter 13. If you are unemployed or only have a minimal source of income such as unemployment insurance, chapter 7 can help you.
In either type of bankruptcy, once you file your case, the “automatic stay” stops all collections, wage garnishments, seizure and civil court actions. Debt collectors are prohibited from contacting you as well.
Chapter 7 Bankruptcy
Chapter 7 bankruptcies are liquidation filings where you can wipe out unsecured debt such as personal loans, medical expenses, department store bills, rent arrearages, past due utility expenses, and credit card debt. In most cases, you will be able to retain most or all of your personal assets. Consumers are allowed to keep a certain amount in “exempt property” for such items as a vehicle, home equity, retirement accounts, furniture, clothing, bank accounts, and other personal belongings. Nonexempt items include second homes, extra vehicles, expensive jewelry or luxury items. Sometimes these can be sold to pay your creditors.
However, if you are facing foreclosure, a chapter 7 filing will only temporarily delay the process. The mortgage lender can get the Court to lift the automatic stay and resume the foreclosure process if you don’t get current on your payments. Although a landlord cannot proceed with eviction proceedings if you are renting and owe past rent, you are still liable for future rent under your lease when the bankruptcy is completed and you receive a discharge from the court.
Whether you are able to make your mortgage and car payments through some other source of income, or do not have these obligations, you can receive some measure of relief through a chapter 7 as you will no longer need to pay your unsecured creditors.
You should also consider the impact a bankruptcy will have on your credit score. If you already have a low credit score, bankruptcy can often significantly improve your score. In most cases, a bankruptcy will remain on your credit report for 10-years. In many cases, loan companies or banks will be able to approve your loan requests because you have been forgiven of your old debt. You might have to pay higher interest if a loan is granted, but approvals are possible, even for a new home mortgage.
Chapter 13 Bankruptcy
A chapter 13 filing generally has the same effect on your credit report as a chapter 13. However, a chapter 13 is a repayment plan where you pay back your creditors over a 3 or 5-year period. You still have to qualify to file and not have unsecured debt over $394,725, or secured debt over $1,184,200. This amount automatically increases over time, and most consumers will be under this threshold.
By filing bankruptcy, you start fresh with a clean slate. A chapter 13, however, is often looked on more favorably by lenders because you are establishing a payment history with your creditors.
An important aspect of a chapter 13 is the requirement that you have a regular monthly income and have enough disposable income to make a monthly payments. If you have secured loans such as on a car or home, then you can keep your property if you keep these payments current. Arrearages can be included in your repayment plan, and brought current over time.
Even if you are unemployed, though, other sources of income may be sufficient for your repayment plan to be approved. These include unemployment insurance, Social Security Disability, Social Security Insurance, trust account income, or annuity payments. So long as you have sufficient disposable income, then you can file under chapter 13 and a home foreclosure can be prevented as well as a vehicle repossession. Although all unsecured and secured debts are included in the plan, the secured debt arrearages are paid off first. If there are unsecured debts remaining at the end of the 3 or 5-year period for the repayment plan, then those are discharged.
The negative part of a chapter 13 is that you are required to continue making the monthly payments and keep current on your secured loans for the duration of the plan. If you cannot maintain the payments, then you can convert the chapter 13 to a chapter 7, or choose to allow the case to be dismissed. If this occurs, then you risk losing the collateral on your secured loans if you are behind on your payments. A mortgage lender may also proceed with a foreclosure, unless you are current.
Talk to a bankruptcy attorney about your options. The law can be complicated, and it can change quickly. Even though you are unemployed, debt relief is available. A trusted professional can usually help you get great results.