What Are My Options If I Find Myself In Debt?

Overwhelming Debt

It is not uncommon for someone to find themselves facing a large amount of debt. Credit card bills happen. Medical bills happen. But what happens when all of a sudden the amount of debt becomes overwhelming and creditors are starting to come after you? It is important to fully understand some of the options that you may have as an individual, whether you choose to seek the assistance of an attorney or decide to handle the matter on your own. There are two main avenues you can choose when you are facing a steep debt and anxious creditors. First, you can declare bankruptcy. Second, you can try to negotiate with the creditors and try to get your debt down to a more manageable number.

Bankruptcy

Filing for bankruptcy is a complex process, but can be an effective way to manage your debt problems. There are two types of bankruptcy to consider, chapter 7 and chapter 13 bankruptcy. A description of each process, including the drawbacks to filing for each follows.

Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, essentially all of your debt is completely erased. It is important to know that some of your property is exempt from bankruptcy, meaning that creditors cannot get their hands on it in order to satisfy your debts. Your other, nonexempt property is sold and the proceeds from that sale are divided up and given to the creditors. If there is not enough money to pay all of your debts after the sale of your property, those debts are erased. The main purpose of filing for Chapter 7 bankruptcy is to discharge certain debts and to give an honest individual a fresh start. Once bankruptcy is declared, you no longer have an obligation to pay those discharged debts.

Filing for bankruptcy immediately stops all collection actions against you or your property. This is called an “automatic stay,” which is effective for a short period of time, usually around a month. During this period, no creditor can begin a lawsuit or continue a lawsuit against you, your wages cannot be garnished, and no one may contact you via telephone demanding payment.

If you are interested in filing for bankruptcy, you must have a detailed list of your finances and be prepared to provide a large amount of paperwork to the bankruptcy court. When you file a Chapter 7 petition with a bankruptcy court you must provide the following:

  1. A schedule of your assets and liabilities;
  2. A schedule of your current income;
  3. A statement of your financial affairs;
  4. A schedule of executory contracts and unexpired leases; and
  5. A copy of your tax return for the most recent tax year.

In addition to this information you will also need to provide the following:

  1. Your certificate of credit counseling;
  2. A list of all your creditors, the amounts of your debts, and the nature of the creditors’ claims against you;
  3. The source, amount, and frequency of your income;
  4. A list of all of your property; and
  5. A detailed list of all of your monthly living expenses, including, food, clothing, shelter, utilities, taxes, transportation, and medicines.

There is a filing fee for Chapter 7 bankruptcy that ranges between $200-300.

Once you file for bankruptcy, all of the creditors that you listed when you filed will be given notice of your bankruptcy. At this point, they are going to know that you are filing for bankruptcy and that it is likely that they will not receive some or any payments on your debts. A person called a trustee is then assigned to your case. The trustee is responsible for organizing your property and assets and selling the property that can be sold in order to pay back your creditors. The trustee must hold a meeting with the creditors, and you will need to be present. At this time the trustee and creditors will ask you some questions about your financial affairs and property that you should be able to answer. After this meeting takes place, the trustee will assess your assets and sell what can be sold.

The following is a list of property that is considered exempt from bankruptcy, however, this list is not necessarily up to date, precise, or all inclusive, but is meant to give you a general idea. If you have concerns or questions regarding what in your case is specifically exempt, feel free to contact a bankruptcy attorney.

  • Real estate (such as your home) up to $360,000 in value
  • 401(k) savings accounts and IRAs
  • Personal property up to $9,000 in value
  • A motor-vehicle up to $4,000 in value
  • Tools of your trade up to $11,000 in value
  • Life insurance valued at $8,000
  • Public benefits such as Social Security and Welfare

Nonexempt assets can include a luxury vehicle, a second home, or a valuable collection.

At times, filing for Chapter 7 bankruptcy may seem like a good idea, particularly, if you do not have nonexempt assets that a trustee can sell. It is important, however, to consider the the consequences and potential disadvantages of filing Chapter 7 before you do so. First of all, filing for Chapter 7 will lower your credit score. Your credit score will also indicate that you have filed for bankruptcy in the past and any company that performs credit score searched will be able to see such records for the next ten years. Second, some debts are not discharged in bankruptcy. These often times include, secured loans (any debt that the creditor has the right to pursue specific pledged property upon default, for example a debt that is backed by a mortgage or a lien), alimony, child support, student loans, and unpaid federal taxes. In most cases these debts are dealt with separately and negotiated down, but not erased. Third, you can only file for Chapter 7 once every eight years, so it is important to know that you are going to be able to get back on your feet, because you won’t be able to get out of debt again for a while. Fourth, if someone co-signed a loan with you, you may no longer have an obligation to pay back the debt, but your co-signer has no legal protection and will become responsible for the full repayment of that debt.

Chapter 7 bankruptcy is often times considered the better option because almost all debts to creditors are eliminated. Chapter 7 is particularly ideal when you don’t have many nonexempt assets to sell. This is an option that can greatly help to eliminate the stress and worry that comes along with your large debts, and can give you a chance at a start fresh.

Chapter 13 Bankruptcy

Chapter 13 is also an option for individuals who face a large amount of debt. The most significant difference between Chapter 7 and Chapter 13 is that Chapter 7 eliminates debts, but if you file for Chapter 13, you come up with a repayment plan. Your debts are not erased. This repayment plan spans between three and five years and works out a reasonable way in which to pay back your debt over time. Chapter 13 is called a “wage earner’s plan,” because it allows people with a regular income to develop a plan to repay all of their debt. During this repayment time (usually three to five years), creditors cannot start or continue any collection efforts against you.

You file for Chapter 13 much like you file for Chapter 7. You have to file a Chapter 13 petition with the bankruptcy court and provide the following information:

  1. A schedule of your assets and liabilities;
  2. A schedule of your current income;
  3. A statement of your financial affairs;
  4. A schedule of executory contracts and unexpired leases;
  5. Evidence of payment from employers, if any, received 60 days before filing;
  6. A statement of net monthly income and anticipated increase in income and anticipated increase in income or expenses after filing for Chapter 13;
  7. A record of any interest that you have in federal or state qualified education of tuition accounts; and
  8. A copy of your tax return for the most recent tax year and returns that are filed during your bankruptcy case.

In addition to this information you will also need to provide the following:

  1. Your certificate of credit counseling;
  2. A list of all your creditors, the amounts of your debts, and the nature of the creditors’ claims against you;
  3. The source, amount, and frequency of your income;
  4. A list of all of your property; and
  5. A detailed list of all of your monthly living expenses, including, food, clothing, shelter, utilities, taxes, transportation, and medicines.

There is a filing fee for filing chapter 13 that may range between $200-300.

Once you file for bankruptcy, all collection actions against you are stopped. This is called an “automatic stay,” and can last up to a month. During this time, foreclosure proceedings, and other lawsuits against you are halted. For a foreclosure debt, you can decide to make payments over time in your repayment plan. It is important to note that you must still make mortgage payments as they come due after filing. Failing to make these payments could result in your losing your home. In addition, a trustee is assigned to your case. In Chapter 13, the trustee is responsible for administering the case and making sure all is understood with the repayment plan. The trustee must also hold a meeting of the creditors, which you must be at. At this time the trustee and creditors will ask you questions about your financial affairs and property that you will have to provide answers to.

Some of the advantages to choosing Chapter 13 over Chapter 7 include keeping all of your property, both exempt and nonexempt, you have a set period of time to pay off your debts, your co-signers on any loans are safe from creditors as long as you continue to make your repayments, you can prevent foreclosure on your home, and you can file for Chapter 13 again, even once you’ve filed for bankruptcy (rather than having to wait eight years).

There are a few disadvantages to Chapter 13 as well. Your debt is not erased like in Chapter 7, and you will still have an obligation to make payments towards working off that debt. Also, in some cases, your disposable income must be paid to the court pursuant to the repayment plan. Your disposable income is the amount of money that a household has available for spending and saving after income taxes and after bills and basic necessities are taken care of. Last, you may not be eligible to file for Chapter 13 if you have a certain amount of unsecured or secured debt. The numbers may vary, but if you have $900,000 in secured debt or more, you may not be able to file.

It is important to know your options when filing for bankruptcy and to consider the pros and cons of filing for bankruptcy in general, as well as whether or not it is best for you to pursue Chapter 7 or Chapter 13 bankruptcy. The process can be complicated and requires a large amount of financial paperwork. Although you may file for bankruptcy as an individual, you should consider contacting a bankruptcy attorney to help you talk through your options and to help with your filing.

Negotiating Your Debts

A lot of times when you hire an attorney to help you settle your debts, the first thing the attorney is going to do is try to negotiate down how much you should owe your creditor. Oftentimes it is possible to try and have your debts reduced by 20%, maybe lowering a debt of $8,000 to $6,400. Although an attorney can do this for you, it is not necessary for an attorney to negotiate on your behalf. Should you choose, you can contact your creditor and try to work out a more manageable debt. If you decide to try to negotiate a price consider the following questions:

  • What can you afford?
  • Think about the possibility of making monthly payments. With your income, how much could you afford to pay monthly?
  • Over how many months would you be able to pay? Consider that extending the monthly payments from paying over 12 months to paying over 24 months, each monthly payment would be smaller.
  • Is you income stable? Will you be able to continue to make regular payments?
  • Debt can look daunting when you receive a statement for unpaid bills totaling, for example $7,000 or more. Some creditors may decide to lower your debt if that means that you could make more reliable payments. This may not always work, and in some cases an attorney may be more able to handle such matters, but it is still an option worth considering.

Conclusion

In conclusion, finding out that you are buried under debt does not mean that you immediately need to find a lawyer for help. You should know that you can take action yourself, should you wish. If you do not wish to handle the matter on your own, it may be helpful to have a basic understanding of your options and what avenue you want to pursue in order to make a specific request of a lawyer. Filing for bankruptcy and talking to creditors can be a complicated process, but they are helpful tools to help you take care of your debt and get you back on your feet.