DEALING WITH DEBT
IS BANKRUPTCY THE WAY OUT? WHAT TO CONSIDER
Most people know someone who is having, or has had, difficult financial times. Loss of a job, such unexpected expenses as catastrophic medical issues, or other personal situations can affect the ability to pay bills in a timely fashion, or at all — and may result in thoughts of filing bankruptcy. But bankruptcy is more than past-due bills. It is not an easy decision and there are many factors to consider. To say it is complicated is an understatement. It is technical and emotional for the debtor and the creditors, as goods and services are provided with the fair expectation of being paid.
Below is information to consider related to bankruptcy. The decision is unique to each situation and requires more resources than can be provided here. Research bankruptcy, access a credit counselor or contact an attorney for additional information.
How it began
Dating back hundreds of years, there are references to forgiveness of debt, as well as punitive approaches to those who could not pay their debts. Most of the authority was with creditors to provide for debt reduction; debtors could not initiate the action. In early American history, there were “debtor’s prisons.” The U.S. Bankruptcy Act of 1841 and Bankruptcy Act of 1867 were both in response to financial crisis.
The modern view of debt and bankruptcy has changed, along with a fundamental change in the creditor-debtor relationship. How business is transacted has also evolved. It’s likely our grandparents did not have multiple credit cards. The financial services industry has grown, with individual purchases driving approximately 70% of the U.S. economy. Without credit, many purchases would not be made.
Before filing
■ Meet with a counselor from a nonprofit credit counseling agency. See the website: www.justice.gov/ust/credit-counseling-by-state/NewMexico for contact information. The free services can provide you with options.
■ Try to negotiate a payment plan with creditors.
■ Review your income and expenses for a budget. Can you supplement your income to pay debts? Can you reduce expenses?
The 2 major types
The CARES Act includes a number of changes to bankruptcy laws designed to make the process more available to businesses and individuals economically disadvantaged by the COVID-19 pandemic.
Chapter 7: This is the most common option and is designed for people who truly cannot afford to pay their bills. To qualify, you must earn less than the median income for a family your size in your state. A “means test” may be an option with the court. Bankruptcy trustee oversees asset liquidation to pay creditors. Most debts are released under Chapter 7. To qualify, the debtor must not have had a Chapter 7 in the past eight years. Credit counseling is required.
Chapter 13: This is known as the “wage earner’s bankruptcy” because it requires you have a steady source of income and unsecured debts — credit cards, medical bills, personal loans, etc. — of less than $418,275 and secured debts — home, car, property, etc. — of less than $1,257,850, as of February 2019. Chapter 13 reorganization requires debtors to repay all or part of their debts within three to five years. Payments go through a bankruptcy trustee. Credit counseling is required.
What qualifies?
Debts that don’t qualify: Child support, alimony, some taxes, debt to government, debts for personal injury caused by driving while intoxicated, and court fines/penalties.
Debts that do qualify: Credit card debt, medical bills, personal loans, lawsuit judgments and obligations from leases or contracts. In addition, Chapter 13 includes debts from divorce and debts for loans from a retirement plan.
Consequences of filing
■ Can hurt your credit score (although your credit score is likely low).
■ Stays on your credit rating for 7-10 years.
■ Damages your ability to get future loans.
■ Holds loan co-signers liable under Chapter 7. Under Chapter 13, protections include the co-signer if payments are made as identified in the Chapter 13 agreement.
■ Becomes part of the public record.
■ May require your home to be surrendered under Chapter 7.
■ Stops home foreclosure proceedings under Chapter 13. Other assets may be taken to pay creditors.
The process is complicated and a mistake could have a major impact on your filing. Consider whether hiring a bankruptcy attorney is best for your situation.