If You Can’t Afford Your Credit Card Payments Bankruptcy Might Be A Good Option
Updated By Cara O’Neill, Attorney
Filing for bankruptcy is not a decision to take lightly. But once you’ve decided to move forward, paying certain debtssuch as credit cardsbecomes a waste of money. Whether it’s time to stop making payments will depend on:
- whether you can afford to pay back the debt
- if you’ve verified that you qualify for bankruptcy
- whether you’re sure you want to file for bankruptcy, and
- if a bankruptcy lawyer has given you the go-ahead.
Unless you’ve done all of the above, not paying your credit card bills could put you in a worse financial position. Find out about these and other considerations.
Types Of Personal Bankruptcies
In the United States a person can file for either one of the following personal bankruptcies
Chapter 7 is also known as liquidation bankruptcy. It involves the sale of assets that are not protected by bankruptcy and the distribution of the proceeds to creditors. The proceeds can cover your debts in as little as 3 months. Chapter 7 bankruptcy will be ideal if you dont have a lot of assets that need protection.
Chapter 13 is also referred to as debt repayment or reorganization. Its ideal for debtors who have many or valuable assets and dont want to lose them. Basically, the debtor tables a proposal that shows how he/she plans to clear amounts owed within a given time frame. One gets the chance to clear all debts either partially or in full. You can also have others dismissed entirely.
Your attorney does a means test to determine which bankruptcy you are eligible for. In a nutshell, you may not be eligible for Chapter 7 if its evident that your income can settle debts under Chapter 13. Similarly, a Chapter 13 bankruptcy may be denied if your debts are too high in comparison to your income.
Can You Negotiate Directly With Your Lenders
Many lenders will lower interest rates or adjust your payment plan if you tell them youre considering bankruptcy. Thats especially true of credit card companies, which stand to lose the most if you cant pay them back. In some cases, you may qualify for a low fixed interest rate but will need to close the card.
If you have student loans, which cant be wiped out in bankruptcy, you may qualify for hardship programs, which lower monthly payments by changing your repayment schedule or tying payments to your income level. Alternatively, you may qualify for deferment or forbearance on your student loans, which temporarily suspend payments.
Some mortgage lenders offer loan modification programs. Call your lender to see if they have a program you qualify for before you declare bankruptcy most lenders are not willing to negotiate afterward. If your mortgage is modified sufficiently, you may avoid bankruptcy, which is beneficial for both you and the lender.
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If You Have An Opportunity To Modify Your Mortgage
These days, many people file for bankruptcy to delay a foreclosure. While bankruptcy can be a good solution in this situation, many people file much earlier than they need to, which makes it more difficult to obtain a mortgage modification. Once you file for bankruptcy, many lenders will refuse to enter into or continue negotiations over your mortgage. Because your bankruptcy will cancel the promissory note part of your mortgage , technically there will be nothing left to negotiate. If you might want to seek a mortgage modification in the future, you probably should avoid bankruptcy — at least until you know which way the modification winds are blowing.
Will I Lose Everything If I File Bankruptcy
No. This is one of the biggest misconceptions. Bankruptcy laws were put into place to provide people who are suffering from financial hardship to get a fresh start. If everything was taken, it would not be much of a fresh start. So, the bankruptcy laws provide exemptions so you may not lose anything.
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Why Is Chapter 13 Probably A Bad Idea
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In a Nutshell
An unsuccessful Chapter 13 can leave you in worse financial shape. It costs more than Chapter 7 and your case is less likely to be successful.
Written byAttorney Jonathan Petts.
When Is Bankruptcy Discharged
To have your bankruptcy discharged means you are released from being personally liable for the debts owed to your creditors included in your bankruptcy.
It signals the start of your fresh start. Your discharge date will depend on your type of bankruptcy:
- Voluntary bankruptcy through a Debtors Petition usually ends, or is discharged, three years and one day after the acceptance of your Statement of Affairs.
- In involuntary bankruptcy, called a Creditors Petition, the trustee appointed will send you the Statement of Affairs to complete and return. In this case, the trustee will lodge the Statement of Affairs. The bankruptcy discharge date is three years and one day after the Statement of Affairs has been lodged and accepted. Its therefore in your best interest to get this completed as soon as possible to get the bankruptcy period started.
Your discharge from bankruptcy will usually occur automatically if you have met your obligations under the Bankruptcy Act unless your trustee has lodged an objection.
Once your bankruptcy has been discharged, youll be released from most of the provisions of the Bankruptcy Act. However, you may still need to assist the trustee.
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Whats The Difference Between Chapter 7 & 13
Chapter 7 bankruptcy , often called straight bankruptcy, is a quick and easy way to eliminate your debt. You will receive your chapter 7 bankruptcy discharge approximately 120 days after the filing of the case. You will not have to pay back any of your unsecured creditors.
Chapter 13 bankruptcy in Michigan, often called reorganization, allows individuals to set up a payment plan to pay their debts back. The debts are paid to creditors according to a court-approved payment plan. The payment plans can run from 3 5 years.
How Do You File Bankruptcy
The process of filing bankruptcy involves a number of steps, beginning by meeting a Licensed Insolvency Trustee. At Spergel, a dedicated trustee will walk you through the entire process. Initially, paperwork will be filed, and it may be necessary to sell some assets if required. It will involve contacting creditors, and attending credit counselling services before debts are legally cleared. Once you are discharged from bankruptcy, you are free from the obligation to repay the debts owed, resulting in solvency once again. Book a free confidential consultation with a member of our compassionate team to discuss the best path forward for you and your finances.
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What Happens To Your Credit Score After Filing Bankruptcy
Chapter 7 bankruptcy and Chapter 13 bankruptcy filings show up on your credit report. How long it shows up depends on which type of bankruptcy you file. Chapter 7 bankruptcy stays on your credit report for 10 years after the filing date. A completed Chapter 13 bankruptcy stays on your credit report for 7 years after the filing date, or 10 years if the case was not completed to discharge.
As a result, filing bankruptcy will initially lower your credit score. How much your credit score will drop depends on how high or low it was before bankruptcy. Generally, a decrease between 100 to 200 points can be expected.
The good news is that you can begin rebuilding your credit as soon as your bankruptcy discharge is entered. It’s possible to have a better score within 1â2 years of filing. The credit scores of most bankruptcy filers are already lower because of missed payments. After the court grants a discharge, most unsecured debts are erased. Credit scores improve because there are no more missed payments and discharged accounts show a zero balance.
After Chapter 7 and Chapter 13 bankruptcy is filed, you will get credit card offers in the mail. These offers can be for secured credit cards, sometimes called prepaid cards, which require a cash deposit. Or, offers can be for unsecured credit cards, but will likely have high interest rates or annual fees.
What Happens To Your House When You File Bankruptcy
Making your house payment on time after bankruptcy, gives you a place to live. But it does not help your credit score. Even if you are keeping the house, the dischargeis an important benefit to you. If real estate values dont recoveror drop againand you cant sell the house when you are ready to move, you are still protected.
Also, after bankruptcy late payments dont count against your after bankruptcy credit. If you complain to the mortgage company about your credit report, they will tell you that you should have reaffirmed your mortgage. Reaffirming takes the house out of the bankruptcy.
Bankruptcy is a powerful debt relief tool, but only if it makes sense for your financial situation. Filing any type of bankruptcy provides immediate debt relief through the automatic stay. Thats the law that prohibits creditors from contacting you as soon as your bankruptcy case has been filed. It also stops a wage garnishment right away.
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What Would Happen If You Didnt Pay
What if you just ignored the calls and letters? Would the creditor sue you? No. Its very, very highly unlikely a debt collector would sue a consumer over an unpaid medical debt that they paid a fraction of the amount owed. They have tens of thousands of other consumers that are willing and able to make payments. The calls and letters will continue to come.
Reasons To Consider Filing For Bankruptcy
Surveys agree that job loss and medical debt are the two biggest reasons for considering bankruptcy. Many times, the two team up and light a torch to a familys financial plans.
Health problems can make it difficult or even impossible to do your job. The result is you either quit or are let go by the company. That is a toxic combination because you lose your source of income at precisely the same time expenses go up.
There are some other, less imposing situations that could cause you to consider bankruptcy. You might be headed down that road if:
- You are getting a divorce
- The home you own is under water and in danger of foreclosure
- The only way you can pay for things is using a credit card
- You use one credit card to pay off another
- You are considering withdrawing money from a 401 account to pay bills
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Things To Consider If Youre Thinking About Filing Bankruptcy
Its important to note the serious impact bankruptcy has on your credit report. Bankruptcy effectively wipes out everything on your credit report the good and bad remarks and it stays on your credit report for 7-10 years.
Which means, any account youve paid off or left in good standing that could positively impact your credit score is wiped out. All the hard work youve put into building your credit is basically nonexistent once you file bankruptcy. True, all the negative remarks are gone, your debt is forgiven and you might even see your credit score go up, but youve pretty much labeled yourself high-risk when it comes to lending.
Bankruptcy seriously affects your ability to open lines of credit credit cards, mortgages, auto loans, personal loans, etc. Because you are now labeled high-risk, most if not all banks will likely deny any application you submit for a line of credit even though your credit score might have gone up. There are a number of factors that determine your credit score, but payment history, access to credit and derogatory remarks have the highest impact.
When you file bankruptcy, you wipe out all of your past payment history, eliminate your access to credit and end up with a derogatory remark regarding the bankruptcy left on your credit report. If you are approved for a line of credit, youll likely get a much higher interest rate which will make any monthly payments higher.
When To Move Forward With Bankruptcy
If none of the above situations apply to you, bankruptcy may be a viable option. And if your debt is spiraling out of control, dont wait too long to declare it.
Below are a few red flags that can indicate your current financial situation is untenable. In these cases, bankruptcy may offer the only way out.
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How Do I Declare Bankruptcy
You can go bankrupt in one of two main ways. The more common route is to voluntarily file for bankruptcy. The second way is for creditors to ask the court to order a person bankrupt.
There are several ways to file bankruptcy, each with pros and cons. You may want to consult a lawyer before proceeding so you can figure out the best fit for your circumstances.
Chapter 13 Has A Failure Rate Of 67%
Why do roughly 2 out of every 3 Chapter 13 cases fail? Well, to get a discharge of your debts, you need to complete a 3-5 year repayment plan. And most plans are 5 years long. Only at the end of the plan will the remainder of some debts be forgiven.
All kinds of unexpected expenses can occur during that 5 year plan like medical bills from getting injury, having children, having funeral expenses for family members. And your income can be reduced unexpectedly from losing your job, getting a pay cut or hour-cut.
Together, all of these life events make it very challenging to make monthly payments over a 5 year period.
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If You’re Overwhelmed By Your Debts Bankruptcy Is Just One Option
If you have large debts that you cant repay, are behind in your mortgage payments and in danger of foreclosure, are being harassed by bill collectorsor all of the abovedeclaring bankruptcy might be your answer. Or it might not be.
Bankruptcy can, in some cases, reduce or eliminate your debts, save your home and keep those bill collectors at bay, but it also has serious consequences, including long-term damage to your . That, in turn, can hamper your ability to borrow in the future, raise the rates you pay for insurance, and even make it difficult to get a job.
Your Lender Wants To Repossess Your Car
Bankruptcys automatic stay also puts an immediate stop to any efforts by your lender to repossess your car. In Chapter 13, you can catch up by including back payments in your plan. In both chapters, you might be able to get your car back if the lender repossessed it recently. Talk to a local bankruptcy lawyer. If youd like to learn more, read Can the Lender Repossess My Car During Chapter 7 Bankruptcy and Car Repossession and Bankruptcy.
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Myth: Chapter 13 Is Useful For Getting Your Drivers License Back
One of the popular uses of Chapter 13 in recent years has been to recover your drivers license. Drivers licenses are frequently suspended by city and state governments when the driver owes a significant amount of parking or traffic tickets.
Unpaid tickets cannot be discharged in Chapter 7, but they can be discharged in Chapter 13. So many debtors file Chapter 13 to get their driverâs license back as shown in this video by ProPublica.
Parking and traffic tickets cause so many bankruptcies in Chicago, the bankruptcy court there leads the country in Chapter 13 filings. Unfortunately, ProPublicaâs research showed that less than 25% of Chapter 13 cases involving ticket debt ended successfully.
Most of these debtors end up paying thousands of dollars in legal fees before their cases were dismissed, without a dime going to pay down their traffic tickets.
As soon as their cases are dismissed, debtors risk losing their cases and licenses again, leading to a cycle of more debt and potentially more bankruptcies.
How Bad Can Bankruptcy Can Be For Your Credit
Bankruptcy can devastate your credit scores and make it difficult for you to qualify for loans or new credit card accounts.
A Chapter 13 bankruptcy remains on your credit report for seven years from the date you file bankruptcy with the court, and a Chapter 7 bankruptcy remains for 10 years from the filing date.
Bankruptcies also have a significant negative effect on your credit scores. Their impact on your scores diminishes over time, but they will tend to lower your credit scores as long as they appear in your credit reports.
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You Will Have A Trustee That Will Manage Your Bankruptcy
Before you apply for bankruptcy, you can choose a registered trustee to administer your bankrupt estate. If you do not choose a registered trustee AFSA may seek the consent of a registered trustee to manage your bankruptcy. If a registered trustee does not provide their consent to act then your estate will initially be administered by the Official Trustee .