By Charissa Potts, Attorney at Freedom Law, PC
Taking a blow to your
financial life – whether it is a medical emergency, outstanding debt that
overwhelms you or another reason – may feel like the ceiling is collapsing on
you. But bankruptcy may be the right tool for fixing your money problems and
setting up a better life over the short term.
Bankruptcy once was something
people shunned, thinking of it as a last resort or financial weakness. But with
more middle-class bankruptcies, people have come to realize that financial
issues don’t need to be hidden away. They can be resolved in a way that is
honorable and proactive. Bankruptcy is a way to focus on the future and correct
the mistakes of the past.
Everyone qualifies for bankruptcy protection, but your circumstances
will determine which Chapter you qualify for.
Chapter 7: This common form of bankruptcy allows individuals to
erase most of their debts. You can find relief from troubling bills through
Chapter 7, which is available to many regardless of the amount of debt owed. You
can be married or single, a homeowner or a renter. Chapter 7 is especially
helpful for people who have medical debts, issues with personal loans or
credit-card debt or loans with collateral that have a high interest rate. The
process can take around 90-120 days, and it will wipe the slate clean quickly.
That said, Chapter 7 stays on
your credit history the longest. For the next decade, borrowers will see that
you’ve had a Chapter 7 bankruptcy on your record. This can affect the interest
rates you’ll receive on loans and credit-card accounts. After bankruptcy you
can quickly rebuild your credit if you are diligent within 1-2 years.
Chapter 13: Think of this form of bankruptcy as the ultimate
repayment plan. This may be a better alternative for someone with a higher
income because you’ll set up a restructuring plan to pay back your debts. It
also works well for someone who suffered a temporary job loss and is ready to
get back on his or her feet in a timely fashion. This sort of bankruptcy takes
around three to five years to complete. Your assets are protected, and you
don’t have to worry about having your wages garnished.
A Chapter 13 bankruptcy stays
on your record for seven years. You will find you can get your financial life
back fairly quickly, and that lots of creditors will be willing to lend you
money. But be careful about what offers you select. Patience is key because the
court will have some say over your financial life for the time you’re in
Chapter 13. You can use a credit card, but make small purchases and pay them
off quickly and completely. Once you have completed your Chapter 13 plan,
you’ll be in strong financial shape to resume your life, whether it is
purchasing a home or taking out a car loan with ease.
Other alternatives: You can
try to negotiate with your lenders to see if they’ll work with you and come up
with a payment plan that satisfies everyone. Be aware that if your lenders
settle for less than the amount owed on a debt, you may be subject to pay
income tax on the forgiven portion of the debt. For instance, if you owe a
creditor $10,000 and the creditor agrees to take $2,000 to settle the debt,
then the creditor is required to issue a 1099-C to you for $8,000 and that is
taxable income. Also be aware that many so-called debt consolidation companies
can you leave your credit score in far worse condition than when you started.
The best idea is to speak with
an attorney that specializes in debt issues. I always give a free consultation
and will give you all the alternatives and you can choose the one that works
best for you.
