More than a million Americans are now unemployed. Some economists estimate unemployment could double over the next year. If you find yourself in this huge pool of job seekers or if your business income drops precipitously as a result of the extended economic downturn, it may be necessary to consider bankruptcy for yourself or your business.
For most of us, bankruptcy feels like the most reprehensible action. However, sometimes it is the only option that makes sense because you simply cannot pay your debts.
According to the U.S. Courts website, “A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial ‘fresh start’ from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision [during the Great Depression]: It gives to the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
While there are eight types of bankruptcy filings, most individuals will find that Chapter 7 (liquidation of debts) or Chapter 13 (debt adjustment and repayment) apply to them. Most businesses can reorganize under Chapter 11. This allows you to keep your business alive and pay creditors (usually a reduced amount) over time.
In 2005, bankruptcy laws changed dramatically, making it much more difficult to file a Chapter 7 bankruptcy, which allows cancellation of your debts rather than repayment under court supervision. If your personal income falls below the median income for your state during the six months prior to the date you file for bankruptcy, you will probably be able to file for Chapter 7 bankruptcy. If your income exceeds the median, it is likely you will not be eligible for Chapter 7.
When bankruptcy laws were changed in 2005, provisions for the burdens of crippling medical bills, assets wiped out by a major stock market decline, decreased house values which prevent refinancing, the constriction of credit markets, or other catastrophic occurrences that destroy your financial equilibrium were not included as part of the legislation. All of this seems to contradict the original intent of the law, but these are the regulations we must adhere to at this time.
If you have huge debt responsibility, which you are not able to pay, combined with income that exceeds your state’s median, first seek credit counseling by researching reputable firms through the National Foundation for Credit Counseling (NFCC). Because there has been so much fraud is this industry, it is essential to only consider the services of credit counselors who are members of the NFCC.
A quality credit counseling firm will charge you extremely low fees. They will secure cooperation from your creditors to reduce your debts substantially and allow you to extend payments over an extended timeframe. While credit counseling used to cause as much harm to your credit ratings as bankruptcy, during 2007 credit scoring changed to reflect the new bankruptcy laws. Now, credit counseling no longer carries a huge penalty. While you will absorb some credit scoring damage as a result of having to close accounts when you enter a debt repayment program, you will not incur the same huge credit hit that accompanies bankruptcy.
If you cannot qualify for Chapter 7 bankruptcy and you can work out a reasonable debt repayment plan through credit counseling, it will be a better alternative – for your long term credit ratings – than filing bankruptcy.
If credit counseling does not produce a payment plan acceptable to you, make an appointment with the most effective bankruptcy attorney for your needs, in your area, to discuss filing Chapter 13 bankruptcy, which is often called the wage-earner’s plan. You need a skilled attorney because you will be repaying your debts through the court for three to five years. Simultaneously, you need to be certain you have enough income to pay your day-to-day living expenses. Without an excellent attorney you could end up short on cash to provide the basics you and your family need to live and work while you repay your debts.
While facing the reality of un-payable bills can be emotionally devastating, rebuilding your credit after bankruptcy can be easier than you might imagine.
Over the next two weeks we will examine business bankruptcy, selecting and working with a bankruptcy attorney, and life after bankruptcy.