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Before Filing For Bankruptcy, Make Sure You Can Afford It!

bankruptcy definitionAlthough it is a legitimate debt solution, a lot of people agree that filing for bankruptcy is a very bad idea. There are so many negative effects like a significant decrease in your credit score, a tainted credit report for the next 10 years, inability to get a personal loan and having the public know about your bankruptcy filing.

A person files for bankruptcy typically because they can no longer pay for their debts. It does not only mean that they do not have a job. Sometimes, they still have a source of income but it is too small to barely cover their basic necessities, much less their debts. There are also cases wherein they have a high salary but a sudden boost of expense due to medical treatments can also make a person unable to pay for their credit obligations. People who are in a severe financial crisis are more likely to declare themselves bankrupt.

Since filing for bankruptcy is associated with a financial crisis, you can expect that the economy will have an effect on it too. An economic downturn could cause a lot of people to be bankrupt. If there is a good economy, then the filings will decrease. The latter seems to be the case of today because USCourts.gov revealed that the bankruptcy filing in March 2014 went down by 11%. This is measuring all filings for the past 12 months ending in March 2014 (1,038,280) and comparing it with the statistics of the previous period of 12 months ending in March 2013 (1,170,324).

While there is a decline in the people filing for bankruptcy, that does not mean the economy is fully recovered. It is better but the number of people going bankrupt is still very big at more than a million.

When you find yourself in the position to file for bankruptcy, you need to ask yourself first if you can really afford it. After all, you are in a financial crisis. Do you know how much it cost to file for bankruptcy?

Costs involved in the bankruptcy process

An article published on Voxeu.org revealed how the recent housing market crash may have been partly caused by the high bankruptcy fees. When people realized that they cannot have their debts discharged because they cannot afford the high fees of bankruptcy, they were forced to default on their mortgages.

While it may be an exaggeration to blame the housing crash on the high cost to file bankruptcy, there is some truth to the fact. It is quite costly. So if you are filing for bankruptcy to save on your debt payments, you have to be prepared to pay the price. Here are some of the costs that you need to prepare for.

  • Attorney fees. This is actually the biggest expense that you will make – between $600 to $5,000. But you should also know that there are lawyers who can help you out for free. You may want to look for pro bono bankruptcy lawyers. But if you are going to hire one that requires payment, the fee will vary depending on the type of case that you will file and where you intend to file your case. Sometimes there are base fees and then other charges are added as you go along. For those who will file Chapter 13 bankruptcy, some lawyers will take their fees from your Chapter 13 repayment plan.
  • Bankruptcy petition preparers. For those who wish to forego the expensive fees of an attorney, they can file their case on their own but they need the services of a bankruptcy petition preparer. This will cost you around $100 to $300 – depending on your case.
  • Credit counseling fees. Before you can file for bankruptcy, it is a must that you have gone through credit counseling with one of the accredited agencies by the US bankruptcy court. This is one of the prerequisites of filing for bankruptcy so you need to pay up for this counseling service. This will cost you around $50.
  • Court filing fees. Of course, you need to pay the court when you file your bankruptcy case. This administration cost will be between $280 to $310 as of May 2014. If your income is less than the 150% of the poverty line, it is possible for you to have this waived when you file for a Chapter 7 bankruptcy.
  • Trustee fee. When you opt for Chapter 13 bankruptcy, a trustee is involved to help distribute the payments you will make in your repayment plan. This involves a fee that is usually 9% of the payment. This is usually included in the payment plan and not considered a separate cost.

On an average, you will be spending around $3,000 or so in filing for bankruptcy. If you land a Chapter 13 filing, you need more because of the repayment plan.

There are hidden dangers when filing for bankruptcy and you may want to know about them before you proceed. This is your way of ensuring that this is the right debt solution for your unique financial situation.

What to do if declaring yourself bankrupt is too costly

In case the only way out for you is bankruptcy but you realize that you cannot afford the fees, there are ways that will help you get the funds that you need to finance this debt solution. Before you file for bankruptcy, you may want to secure your payment first so the proceedings will go smoothly.

Here are some sources that you can get funds from.

  • Borrow from family or friends. This is also tricky because a family loan does not just put the money on the line – it also puts the relationship in danger. If you have no choice, just make sure that you make it official by documenting the loan. Also, have a payment plan in place so you will not compromise your future payments.
  • Stop paying your credit cards. You will try to have them discharged anyway. Save the money for your bankruptcy fees. Just make sure that you have a high chance of qualifying for Chapter 7 bankruptcy. Otherwise, you might end up having your case dismissed and paying your balance plus interest and late payment charges.
  • Use any windfall money. These include bonuses, tax refunds and commissions. Put them aside so you have something to use then you are filing for bankruptcy.
  • Lower your expenses. This may be tough if you are in a financial crisis because you are probably living with only the bare basic necessities. But there might be something that you can cut back on further. Planning your meals well, carpooling to work and brown bagging your lunch – these are cut backs that you can afford to make for now.
  • Earn more money. Get rid of the things in your home that you do not need and sell them. Things that you think have no value may be something that someone is willing to pay a huge amount of money for.
  • Get from your existing assets. If you have your 401(k), you may be able to get money from this account. Just make sure that you can put it back.

Filing for bankruptcy is not something that you should take lightly. But if you have to go through with it, make sure that you will practice the right financial management habits to avoid committing the same mistakes again.

Among the things that you should work on immediately is to build up your emergency fund. According to an article published on NerdWallet.com, the main reason that people are filing for bankruptcy is because of medical bills. Since this is one cost that just keeps on rising, you need to be prepared for it.

How To Aim For Debt Settlement To Avoid Bankruptcy

US Bankruptcy CourtWhile there are some cases wherein bankruptcy is the only option, you have to realize that you need to exhaust all possible alternatives first. It is never a good idea to just plunge headlong into this debt solution – no matter how fast it gets you out of debt. You should realize that the repercussions and damages is too great to ignore. If you can make further sacrifices in order to afford one of the other debt relief options, that is something that you may have to face.

Even if bankruptcy can discharge your debts, that does not mean you will not spend anything. There are several costs to consider like the processing fee involved in filing your petition. Not only that, you have to pay for the professional fee of the lawyer who will help you out. If anything, the cost should be one more reason for you to avoid bankruptcy.

Why debt settlement is better than bankruptcy

Because of the many disadvantages and pitfalls of bankruptcy, you may want to consider the next best thing – debt settlement.

A consumer has two options when it comes to bankruptcy – Chapter 7 and Chapter 13. The first is the better option because most of your debts will be discharged – at least whatever is not paid after the liquidation of your assets. The latter, on the other hand, will subject you through a court-ordered repayment plan that will take months to a couple of years to complete. While Chapter 13 can protect your assets, you will still be paying a portion of your credit obligations. If that is the case, then you may want to just avoid bankruptcy and opt for debt settlement.

If you compare debt settlement with bankruptcy, you will realize that there are some advantages to be gained with the former. Here are some of the reasons why debt settlement should be chosen over bankruptcy.

  • Lesser damage on your credit score. One of the main reasons why you need to choose debt settlement is for the damages that bankruptcy can bring to your credit report. The effects of bankruptcy can be as high as a 200 point reduction on your current credit score. In debt settlement, the average reduction is only 50 points – which is not so difficult to regain once you get yourself out of debt.

  • Your financial difficulty will remain to be a private thing. Another reason why you want your debts to be solved by debt settlement is the fact that your problem will remain to be a private issue. Everyone who filed for bankruptcy will be placed in a public record. If you want to avoid bankruptcy and this embarrassment, just opt for settling your debts.

  • Protection of your personal assets. Another reason why you need to stick to debt settlement is the fact that you can protect your possessions from being liquidated. If you have some properties that you don’t mind selling, you can do that but it will be under your own terms – not the court.

How to stretch your finances to afford debt settlement

To be sure that you are doing the right thing, you may want to consider going through credit counseling to determine if your finances can really afford debt settlement. Anyway, bankruptcy will require you to go through this so it may be best to get a head start. You are not losing anything and you get professional confirmation as to whether you should avoid bankruptcy or not. You can look through the list of accredited credit counseling agencies on the US Department of Justice website to find the company that you can trust.

One of the reasons why a counselor will tell you to file for bankruptcy is when your finances cannot afford it. Most people, because of the possibility of a Chapter 7 bankruptcy believe that this is the more economical choice for the to get out of debt. While there may be some truth to that, you have to realize that there are ways for you to make debt settlement cheaper. For one, you can forego hiring a debt negotiator and just conduct your own settlement proceedings. That could save you some money.

Here are other tips to help you grow your finances and thus afford debt settlement.

  • Cut back on spending. You need to analyze carefully your monthly expenses so you can see where you can cut back on what you usually spend on. While this can grow your debt payment fund, it will be fairly limited but a small amount is better than nothing.

  • Earn more money. Of course, there is also the option to earn more money. You can opt to get a second job or build up an online career to help you get out of debt. That should help you get your hands on more money to help with debt payments.

  • Stop incurring debt. It is also a good idea to stop acquiring more debts. This will take a lot of your effort and self control but if you are successful, you can find yourself loving the debt free life.

  • Grow your savings. Lastly, try to grow your savings. This is very important because it will help you finance an emergency situation and thus keep you from the need to borrow money. You can simply use your savings to get out of your unexpected expense.

Here is a video that will help you decide if you should file for bankruptcy and the negative effects that it has on your financial future.

Is Bankruptcy A Good Option For Debt Relief?

Gavel, pen and document titled Petition To File For BankruptcyDid you know that you have a constitutional right to declare bankruptcy? It’s true. It’s right there in the Constitution. Our Founding Fathers clearly understood about debt and that people should have an option for dealing with it. After all, they came from a country, which at one time actually had debtors’ prisons.

Which type of bankruptcy?

There are a number of different kinds of bankruptcies but really only two that are available to  individuals that could help with debt.  They are a chapter 7 and a chapter 13 bankruptcy. The two are very different and it’s important to understand what they are.

A reorganization bankruptcy

A chapter 13 bankruptcy is called a reorganization bankruptcy because its purpose is to give you a timeout during which you would reorganize your finances and pay off your creditors. The short explanation of how a chapter 13 works is that you create a plan for paying your creditors, which you submit to the bankruptcy court. If your plan is accepted, you will be protected from garnishments, lawsuits and other actions by your creditors. You will be allowed to keep your assets but, unlike a Chapter 7, you will not have your debts immediately discharged. Instead, you must complete the payments required by your plan, at which time your remaining debts will be discharged.
Here’s a video that explains more about what to expect if you were to chose a chapter 13 bankruptcy.

A liquidation bankruptcy

A chapter 7 bankruptcy is usually called a liquidation bankruptcy for two reasons. First, it can be used to liquidate almost all of your unsecured debts. But second, it’s to liquidate your assets so that your creditors can be paid. This is where a court appointed trustee takes control of any of your assets that are not “exempt,” liquidates them (sells them off) and uses the proceeds to pay your creditors. While bankruptcy laws vary from state to state, exempt assets usually include most or all of the equity in your house, the equity in your vehicles, your personal possessions and furnishings and any tools that are required by your job. This means that in most chapter 7 bankruptcies there are no assets that can be liquidated. These are called “no asset” cases.

Why a chapter 7 bankruptcy might be a good solution for debt relief

Most people who file for bankruptcy choose a chapter 7 as a way to achieve debt relief. This is because it will get rid of almost all unsecured debts. What are unsecured debts? They are ones where you were not required to provide any collateral. This includes credit card debts, medical bills, personal lines of credit, repossessions and collections and personal loans. Since these are the types of debts that get most people into trouble chapter 7 bankruptcies have become the most popular way to get out from under debts.

Why a chapter 7 bankruptcy might not be a good option

There are reasons why filing for a chapter 7 bankruptcy might not be the best way to achieve debt relief. These include:

  • Your credit score could plummet
  • You will be forced to undergo consumer credit counseling
  • You could lose a valuable asset
  • It will not discharge all unsecured debts
  • You will lose your credit cards
  • You will be required to pay some of your debts
  • Your interest rates will increase
  • Your auto insurance premium will likely go up
  • The court could convert your bankruptcy into a chapter 13

The affect on your credit score and your creditMan climbing credi score numbers

Probably the biggest con of a chapter 7 bankruptcy is what it will do to your credit score. Most experts believe it will drop it by as much as 200 points. If you had a decent credit score of, say, 600 going in your score might be as low as 400 after your bankruptcy. This would make it very difficult for you to get any new credit for at least two to three years.

In addition, a chapter 7 bankruptcy will stay in your credit report for either seven or 10 years – depending on the credit-reporting bureau. And it will stay in your public record for the rest of your life.

The debts that won’t be discharged

A chapter 7 bankruptcy cannot discharge secured debts such as a mortgage or auto loan. It can also not discharge certain unsecured debts including child support and alimony, student loan debts and debts obtained through fraud.

The effect on your interest rates

A chapter 7 bankruptcy will definitely have a very negative effect on your interest rates. As an example of this, if you were to get a new mortgage it could have an interest rate of as much as two percentage points higher than if you had not declared bankruptcy. Those two points may not seem like much but can add up to thousands and thousands of dollars over the life of that mortgage.

Even your insurance premium

Most insurance companies now factor in your credit score when calculating your auto insurance premium. This means that if you have had a chapter 7 bankruptcy that has lowered your credit score appreciably, you can just count on paying higher auto insurance premiums.

You could be forced into a chapter 13

If you were to file for a chapter 7 bankruptcy and had a certain amount of disposable income, your case could be converted from a chapter 7 to a chapter 13. Instead of being free of most of your debts, you would then be required to repay most of them over the next three to five years. So instead of getting a fresh start, you would three to five tough years of living on a very restricted budget.

What To Do When Bankruptcy Is The Only Option

bankruptcy definitionIf you find yourself buckling under heavy loads of debt, you may want to think about bankruptcy as one of your options of solving it. A lot of financial experts will tell you to make this as your last option. The repercussions of bankruptcy on your credit history is just too monumental to ignore.

Your credit score will go down 200 points and your filing will be placed in public records. For the next 10 years, your credit report will show that you have filed for this. Every time anyone looks at that report, they will know that you have once been financially incapable of paying your dues. That will not bode well for future lenders, potential business partners, prospect employers and even landlords.

However, there are instances wherein this option is the only way out. Some people make the mistake of trying to consolidate or settle their debts when in reality, their finances just cannot afford it. There are situations wherein the consumer’s money is not even enough to afford the debt reduction the debt settlement can give. If that is the case, you may just have to face and accept that bankruptcy is your only way out.

Signs bankruptcy is the only debt relief option left

As scary as the situation may seem, there are people who have emerged victorious from bankruptcy. But at the same time, there are those who were left in a worse shape after. You want to the be like the former so make sure you have the following signs to prove that you do need to file your petition for bankruptcy.

  • You have an income but it is barely enough to pay for your basic needs, much alone your debts.

  • You’ve been using your credit cards to pay for basic needs and you have no idea how to pay it back.

  • You have been late on most, if not all of your credit payments.

  • You are buried under medical debt and you are still incurring more.

  • You do not think that your situation will improve in the next year or so.

If one or more of these describe your current financial situation, you may want to think about your bankruptcy options. A good way to confirm your decision is to get credit counseling. The credit counselor will take a look at your finances: from your income to your expenses to your credit obligations. They will tell you if you have other options aside from bankruptcy or if it is your only way out. This is a requirement anyway for anyone who wants to file. The judicial court dictates that you have to get credit counseling 6 months before filing. You will be required to submit a certificate from one of their accredited agencies on their list. You can get this list from the website of the US Department of Justice.

Know your bankruptcy options

There are two bankruptcy options that consumers can file. You will not be allowed to choose because it is the bankruptcy court who will decide for you. This will be done through a means test. This test will determine if you can file a Chapter 7 or Chapter 13.

Chapter 7. This bankruptcy option will get you out of debt very quickly – usually in a couple of months. This is for those who are really in severe financial crisis. However, it will take most of your possessions from you. All the assets of the consumer that can be liquidated will be sold and the profits will be distributed to the different creditors. Although, there are lists of exemptions in bankruptcy that indicates what cannot be liquidated. For instance, your 401(k) will not be taken from you during the liquidation process. Anything that is not paid through your liquidated assets will be discharged by the court.

Chapter 13. This is usually for people who file and have an income that is above the average median salary of the State. This option will subject the consumer under a repayment plan that the court will issue. You have to complete the payments on this plan and that could take a couple of years to complete – usually 3-5 years. Anything that is beyond this repayment plan will be discharged – but only after the consumer complete the payments. The great thing about this is none of your assets will be liquidated.

Important information when filing for bankruptcy

Most bankruptcy filers perform their own means test to determine if they will fall under Chapter 7 or Chapter 13. If they fall under the latter, some of them opt for debt settlement instead. Of course, the difference is they have to wait for the creditor to decide if they want to accept the settlement while in bankruptcy, the court will decide. There is nothing that the creditor can do about it once the judge makes a decision.

You should also consider the costs that bankruptcy will get you to pay. You have the lawyer fees and also the administrative costs of filing. In some cases, the costs will rise between $1,500 to $3,000. You can oversee your own bankruptcy proceeding but you could end up wasting your money if you make a mistake withe documents.

After bankruptcy, your credit score will be in a very bad shape but you need not lose hope. In some cases, the fast relief will give you a clean slate to work with. The great thing about this option is your creditors will no longer be able to come after you for the discharged debt. That can really help you put your debts behind you so you can start managing your finances correctly from now on.

How Each Debt Relief Program Affects Your Credit Score

man jumping with chart behindYour credit score has grown to be one of the most important figures that you will have to monitor in your financial life. Some people think that this is only for those who plan to take out a loan. It may be true that this will help paint you as a low risk borrower and will prompt the lender to give you a low interest on your loan. However, the effects will not stop there. It is also important because it will pave the way for you to enjoy various financial opportunities like better employment and even renting opportunities.

If you are in debt and you have been struggling with your payments, you can expect that your credit score have gone down. The extent of the damage will depend on your overall debt situation. While paying off your debt may be the priority right now, you need to think about fixing your credit ranking too.

This is why you need to make your debt relief choice depending on how much you can afford to sacrifice your score.

Debt consolidation has the least effect of credit reports

Among the debt relief options, debt consolidation has the least effect on your score. The options will also help you fix your score as you go through the whole process. The reason why this hardly has an effect is because you will still end up paying for all of your debts. That will not give the creditor any reason to put a negative entry in your credit report.

Here are the options that you have if you want to keep your credit score from being ruined.

  • Debt consolidation loan. This type of debt relief program involves getting out of debt through a loan that you will use to payoff your multiple debts. You will benefit from this because you will have a single and lower monthly payment. This happens because you will be getting a low interest on the loan that you will use to pay off your other debts. Not only that, loan terms are usually longer so your balance will be stretched over a longer payment period. This debt relief option may affect your score a little because the lender will have to get a copy of your credit report and that means an inquiry will reflect on your score. Not only that, your report will show a big debt amount – but this will only be for awhile. Once you get the loan, you will pay off the other debts completely and while that will not lower your score immediately, it will have a positive effect eventually. And since you only have a single and lower payment, the chances of you displaying good payment behavior is more likely to happen. That will boost your credit score slowly but surely. To maximize this option, you need that low interest and that requires a good credit score or a collateral. While there are loans for people with bad credit, this is not really advisable.

  • Debt management. In case you do not like using a loan, debt management is another option to consolidate debt. This involves a credit counselor who will help you by creating a debt management plan (DMP) for you. This plan contains your lower monthly payment proposal which is made possible not because you asked for a reduction, but because you stretched it over a longer payment period. This plan will be showed to your creditor and the counselor will also ask for a lower interest rate – but that is as far as their negotiations will go. Once the DMP is approved, you will send a single monthly payment to the counselor who will take charge of getting the respective payments to your creditors. This option will not have much effect on your score because there will be no inquiry on your report and your debt amount will remain the same. Not only that, the counselor will help make sure that you will not use your cards while in the program and that will keep you from incurring more debts.

Although these two can take care of your credit rating, you need to go through a longer payment period – around 5 years or less. Also, the lack of debt reduction may have kept your score intact but that also means you need a steady income to support your payments. If that is not possible, you may have to opt for other debt solutions.

Debt relief programs that can lower your credit score

In some cases, people really need a debt reduction simply because they do not have the money to pay all of their debts. It can be caused by job loss or an ongoing medical treatment. Anyway, there are debt relief programs that can arrange much lower payments but that could result in a negative entry in your credit report.

Here are your options.

  • Debt settlement. This debt reduction aims to convince the creditor that you are in a financial crisis so they will allow you to pay only a portion of your debts. Once you have paid that part off, the rest of your debts will be forgiven. You can probably understand how that will make your creditors hesitant to settle with you. The effect of this process on your credit score is when you default on your payments. To convince the creditor that you are in a financial crisis, you have to intentionally stop paying your monthly dues. Instead of paying your debt, you will put it aside, in a separate and secure account. You will grow that to be your settlement payment. This will lower your score because later payments affect 35% of your debt. And if you are dealing with credit cards, that would mean your debts will continue to increase as interest and late penalty charges will grow your balance. That affects your debt amount – which is 30% of your credit score. This is how your credit rating will be affected. If you will hire a professional to help with this program, you need to make sure it will be with a reliable company. To find legitimate debt settlement companies, you want to look for duly accredited ones and those who are members of reputable organizations like the AFCC or American Fair Credit Council.

  • Bankruptcy. The last option, and usually the last resort of people in debt is bankruptcy because it can lower your score for at least 200 points. This is because bankruptcy means you have put yourself in the lowest financial position that has no other way to recover except to have your debts discharged. When you go through this, future lenders and even potential employers and business partners may find you to be a risky investment. It signifies that you cannot be trusted with money. That is all reflected in your credit report. You need to think about all of this when you apply for bankruptcy.

While these credit score implications may be scary, remember that you can improve it. Bankruptcy filers may have a hard time in the next decade or so but if they really do not have a choice in terms of their financial capabilities, they need to face the facts. It may be difficult but there is a way to improve your credit score – even after bankruptcy.

Debt Relief Options For Different Financial Situations

Debt Relief Options For Different Financial SituationsThere are many debt relief options to help you get out of your current financial crisis. Of course, it all begins with you understanding what got you in this situation in the first place. This will help keep you out of debt and also allow you to achieve debt freedom a lot faster.

Once you have identified that, you may want to take a look at your finances and the type of debts that you owe. There is no shortage of debt solutions. However, you need to know the right program that will suit your problems best. There is no one formula and to maximize your limited resources, you need to base your debt relief program on how much you can afford to pay your debts.

There is a specific solution depending on your financial situation. Each of our status is unique but we usually fall under one of three categories when it comes to our debts.

Before you find the category and debt solution that suits you best, take a look at your budget first. Identify your income and expenses (excluding debts) and get the difference. Whatever is left will be the disposable income that you can allot for your debt payments.

Debt relief for people with money for minimum payments

The first financial situation is having enough disposable income to cover your minimum payments. The extreme scenario is having a little deficit on your monthly requirement – but nothing significant. If this is your financial standing, you can afford to use debt consolidation to solve your problems. The benefits of this includes the following:

  • Lower monthly payment

  • Possible lower interest rate

  • Longer payment period

  • Single payment scheme

  • Does not affect your credit score.

What you have to know, which is important too, is that this option will not give you a debt reduction. The lower monthly payment is possible because your current balance is stretched over a longer term. The lower interest rate is also responsible for this. But in terms of reducing what you owe, there will be none of that. You will still end up paying for everything that you owe. This means a steady and stable income is needed. You should also boost your savings so that you can meet your debt payments without a problem. This program takes 5 years to complete so you need to be sure that your income can keep up with such a long payment period.

There are two popular ways to consolidate your debts.

Debt consolidation loan. This option involves getting a low interest loan that you will get to help you pay for your multiple debts. Once the loan is approved, you can simply go to your creditors, pay them all completely and just concentrate on the single payment that is required from this one loan. To maximize this option, you need to make sure you will get a low interest – which means you either have a good credit score or a collateral.

Debt management. In case you do not have the ideal credit score or collateral, you can use debt management instead of getting a loan. This option allows you to work with a credit counselor who will help you come up with a debt management plan that will contain your proposed lower payment terms. The counselor will present this to the creditor. When approved, you will send a single monthly payment to the counselor who will take charge of distributing the funds to your different creditors.

With the latter, you need to be careful about your choice of company. Make sure you brush up on your knowledge of the Telemarketing Sales Rule (TSR) to help you identify the legitimate companies from the not.

Best debt solution when you cannot meet your minimum payments

In case your financial situation cannot afford to meet your minimum payments, you obviously need a debt reduction. This is when debt settlement becomes the better option for debt relief. The whole idea of this program is to convince your creditor that you are in a financial crisis. You want them to allow you to pay only a portion of your debts and have the rest forgiven. This program will give you the following benefits:

  • Eliminate collection calls (if you work with a debt negotiator).

  • Reduce your current balance significantly.

  • Get you debt free in 2-4 years.

  • Possible elimination of interest rate and other charges.

The catch here is that you need to default on your payments in order to convince your creditors that you are in a financial crisis. This would mean you have deal with a damaged credit score. Instead of paying your creditors, you will send your money in a secured account and grow it there until you and the creditor comes into an agreement.

While you can do this on your own, you will get a lot of benefits by getting a professional to work with you. The debt negotiator will bring their expertise into the whole process. You will also be left in peace because part of their service includes taking over communication calls. Just make sure that they are certified by authority training organizations like the IAPDA or International Association of Professional Debt Arbitrators.

Credit relief for people in severe financial conditions

In case your conditions are quite severe, your option is to file for bankruptcy. This means your income is barely enough to pay for your basic necessities or you have very little income coming in (or none at all). Most financial advisers will tell you to exhaust other options first before opting for this one. This will have severe effects on your credit score and that will make it even more difficult to recover after getting debt freedom. Having bankruptcy on your credit report will make it hard for you to get financial assistance for a home or a business that you want to put up.

When you file your petition, the court will assign the type of bankruptcy that you qualify for. This involves the means test. If your income is lower than the state average, you can qualify for Chapter 7 wherein your assets will be liquidated and anything that does not get paid will be discharged. If your income is above the average, you qualify for Chapter 13. This means you will be subjected to a repayment plan. This type of bankruptcy is not so different from debt settlement.

The US Courts website hold a lot of information about bankruptcy that will help you understand the whole process. It is best to gather information first so you know your options very well. That will help you make smart choices about your debt solution.

Bankruptcy vs. Debt Relief – Which Should You Choose?

Woman holding bills in both hands and looking confusedFeel as if you were drowning in debt? For whatever it’s worth you’re part of a large group. Consumer debt is now higher than it ever has been before. We have seen reports that the average consumer owes more than $5000 just in credit card debt. When you add on mortgages, auto loans, personal loans, etc., this swells to an average of $15,325 per family. If you find yourself hopelessly in debt, you have two possible options – debt relief or declare bankruptcy. How can you know which might be best for you?

The option of last resort

Bankruptcy is usually considered to be a last resort. Why is this? It’s because of the long-term effect this will have on your credit worthiness. As reported in an article on the FTC website, information about your bankruptcy, including when you filed and when it was discharged, will stay in your credit report for 7 or 10 years. It will not only hurt your capacity for getting credit, it can hamper your chances of getting a job, auto insurance or even a place to rent. Plus, a bankruptcy will stay in your public record for your entire life.

Watch out for those bankruptcy ads

There must be a lot of people in trouble with debt as you can hardly turn on the TV or radio without seeing or hearing an ad that promises you can consolidate all of your bills into one monthly payment without borrowing any money or that you can stop creditor harassment, tax levies, foreclosures, garnishments and repossessions simply by filing for bankruptcy. While some of this is true, not all of it is.

What a bankruptcy can and can’t do

A chapter 7 bankruptcy, which is the most popular, can discharge or dismiss most of your unsecured debts. And it can stop creditor harassment. However, it can do nothing about past due taxes and foreclosures. A chapter 7 bankruptcy wills also not discharge student loan debts, child support and alimony or debts that were obtained through fraud. The reason why it can do nothing about a foreclosure is because that’s a secured loan and a Chapter 7 cannot discharge secured loans. This would also include auto loans.

You will need to go through credit counseling

Our Congress changed the bankruptcy laws a few years ago. One of these changes is that you must get credit counseling from a government-approved organization within six months before you file. You are also required to complete a debtor education course before your debts will be discharged.

Pre-bankruptcy counseling

The pre–bankruptcy counseling you will be required to complete will consist of a counseling session with an approved credit counseling organization. This typically includes an evaluation of your personal situation, a discussion of what alternatives you could take instead of declaring bankruptcy and a budget plan. One of these sessions typically lasts about 60 to 90 minutes. You can get this counseling in person, online or on the telephone. When you complete this counseling you must get a certificate proving that you completed it. You should make sure that the certificate you received is from a counseling organization that has been approved in the judicial district where you will file for bankruptcy.

Other options

Given the seriously adverse effect that a bankruptcy would have on your credit report and credit score, you should definitely investigate some other options before filing. Here are a few of them.

• Try credit counseling. Credit counseling organizations will work with you as well as your creditors to develop a debt management plan. Your plan will necessitate that you send money every month to the counseling service. It will then distribute the money to your creditors. Some of these agencies are nonprofit organizations and offer teir services free or for a very low cost.

• Talk with your creditors. Many of them may be willing to help you out with a modified payment plan.

• Consider all of your options before you take out a home equity line of credit (HELOC) or a second mortgage. While you could consolidate your debt
with one of these loans, they both require that you use your home as collateral.

If a debt consolidation loan interests you, watch this video to learn more about this works.

How to choose a credit counseling agency

credit counseling signIf you decide to opt for credit counseling here are some criteria to use in judging them before you sign up with one.

• Will they help your develop a plan to avoid future problems?
• What are your fees?
• Can you afford its fees?
• What are the different services you offer?
• What are the qualifications of your counselors? Are the accredited or certified by some outside organization? What is the training they receive?
• What if I can’t afford your fees?
• How do you keep my information secure?
• How are your employees compensated? Do they earn more if I sign-up for certain services or is it a flat fee?

Consider debt settlement

Debt settlement has become increasingly popular over the past few years because it represents the only way to get debts reduced, which can help a person become debt-free faster than the five years that are usually required to complete a debt management plan. Another advantage of debt settlement is that it doesn’t require you to borrow more money. As the old adage goes, “you can’t borrow your way out of debt.”

Debt settlement will have an impact on your credit score but not as harsh a one as a bankruptcy. For example, most financial experts believe that a bankruptcy will lower your credit score by approximately 200 points but debt settlement will reduce it by only about 80 points.

How To Be Smart With Debt Relief

How To Be Smart With Debt ReliefDebt relief is the foremost concern for people who are deep in credit obligations. If you are struggling to meet your payments every month, you are in need of help.

What you have to understand is that there is no one solution for all types of debt problems. If you think about it, the challenge in being smart with debt relief is not in finding a solution, but in choosing the right one. To do that, you need to know what each program can do for you.

Before we can discuss how you can be smart with debt relief, let us define the different programs that you can use. We can classify it into two categories, the programs that will help you consolidate debt and those that will give you debt reduction.

Debt solutions that lead to consolidation

There are three programs that can help you consolidate your debt. These provide the following benefits:

  • Single payment scheme

  • Lower monthly payment

  • Lower interest rate

  • Longer payment term (except for balance transfer).

Here are the different types of debt consolidation programs.

Debt Consolidation Loan

This program is done without the help of a professional. The consumer gets a master loan that is big enough to pay for their other credit accounts. That way, the multiple debts are completely paid off and the consumer is left with only one payment everyone – which is for the master loan. In most cases, a good credit score and a collateral ensures a low interest rate that can lower the monthly payments of the consumer. To lower that even further, the consumer can choose a long payment period for their new loan.

Debt Management

Debt management is actually an extended version of credit counseling that begins with debt education. The credit counselor will help you analyze your finances and debt obligations to come up with a structured payment plan. If you wish to extend the service of the counselor, you can ask them to help you come up with a debt management plan that shows a lower monthly payment because of a longer payment term. This will be presented by the counselor to your creditor. Upon approval, you will send a single monthly payment to the counselor who will distribute it to your different creditors. The counselor will propose a lower payment term to the creditor but this it is not always guaranteed that they will agree.

Balance Transfer

A balance transfer is simply using a new card account to transfer the balance of your high interest debts. These new cards are usually offered with a zero interest introductory period. Any payment made towards the debt during this time will be deducted from the principal debt. That will help the consumer make better progress in paying down what they owe.

The thing about these programs is you will still end up paying for the total amount that you owe. That means you need to have a steady and stable income to support payments and it usually takes you longer to finish paying your debts.

Debt relief options for debt reduction

On the other side, you have the programs that will help you reduce your debts. This will provide the following benefits:

  • Lower monthly payment

  • Reduction of debt balance

  • Forgiveness of a portion of the debt

  • Faster debt relief

Here are the two types of debt reduction programs.

Debt Settlement

This program may or may not involve a debt professional. The goal is to convince the creditor to allow you to pay only a part of your debt and have the rest forgiven. To do this, you have to default on your payments deliberately. You want the creditor to believe that you can in a financial crisis. Instead of sending payments to the creditor, you will put it aside and grow it as your debt settlement fund. Once it is big enough, you will offer it to the creditor and ask them to forgive the remainder of your debt if you can send them this one lump sum payment. In most cases, they will agree but you have to be patient because the creditors may drag this out.

Bankruptcy

Another way to achieve debt reduction is through bankruptcy. You will be subjected to the means test that will determine if you will qualify for either Chapter 7 or Chapter 13. In the former, all your valuable assets (except those included in the exemption list) will be liquidated and sent to your creditors. Anything that is left unpaid with will be discharged. The latter is a lot similar to debt settlement. You will be subjected to a repayment plan that will pay only a portion of what you owe and have the rest forgiven.

Since this has a debt reduction, it will have a negative effect on your credit score. And this is only ideal for those who are in a real financial crisis.

Different criteria in selecting a debt relief program

In choosing a debt relief option, you need to satisfy a couple of criteria: the type of debt that you owe, your financial capabilities to pay off the monthly requirements, the debt relief program requirements and your financial goals.

Type of debt

Most of unsecured debts can be solved by any of the debt relief programs. For secured debts, there is only a handful of programs that can accommodate it like debt consolidation loans and bankruptcy. You need to identify if your debts can be solved by the program you are eyeing before you proceed.

Financial capabilities

You also have to look at your ability to pay off your debts. If you can manage your minimum payments, you can stick with debt consolidation programs. But if not, you may want to aim for debt reduction. Do not force it if you are only financially qualified for bankruptcy because it could leave you with more debt than when you started. If you wish to get help, you can use the debt calculator of National Debt Relief. There are also available calculators in Bankrate.com or Crown.org.

Debt relief requirements

Each of the programs have their own requirements. For instance, debt settlement and bankruptcy will require you to be in a real financial crisis. In debt consolidation loan, you need either a good credit score or a collateral to get a low interest on your loan. In any of the debt consolidation programs, a steady income is needed for the payments (which was mentioned already earlier).

Financial goals

The last consideration is your financial goals. If you want to build a business or buy a home after you deal with your debt problem, you want to maintain a good credit score for that. If that is your future plan, you should choose a debt relief program that will take care of your score. That means debt reduction is out of the question.

Finding the right program is not that difficult but as you have discovered, there are several details to consider. Knowledge will be your best arsenal to succeed. To know your rights as a consumer you should also beef up your data bank on consumer laws through the Federal Trade Commission. This will help you in the event you need to face creditors on your own.

If You File For Bankruptcy Will You Lose Your 401(k)?

BankruptcyAre you so far down into debt you can’t see up? If so, you don’t need to feel ashamed. This has happened to millions of people. For that matter it might not even be your fault. You may have suffered a cataclysmic illness, injury or automobile accident that cost you thousands of dollars. Or maybe you lost your job as a result of the Great Recession and have been unable to find a new job – or at least one that pays as much as you had been earning

If you’re considering bankruptcy

Bankruptcy can be a good option for people who are really seriously in debt. The most popular type of bankruptcy is a chapter 7. It is called a liquidation bankruptcy for two reasons. First, it’s meant to liquidate all of your assets so that your creditors can be paid off. And second it should liquidate all or most of your unsecured debts.

Secured versus unsecured debts.

Secured debts are those where you were required to provide something as collateral. This could be your house in the form of a mortgage or your vehicle as an auto loan. In comparison, unsecured loans are those where you were not required to provide any collateral. The most common forms of these loans are credit cards, personal lines of credit, medical bills and personal loans. A bankruptcy will dismiss these types of debts. However, it won’t discharge secured debts nor can it get rid of some other types of unsecured debts such as student loan debt, child support, alimony and past-due taxes.

What will not be liquidated

While a chapter 7 bankruptcy is meant to liquidate your assets this usually happens only in theory. The law protects many of your assets from being seized. While bankruptcy laws vary from state to state, people who file for a chapter 7 are almost always able to keep the equity in their home and vehicles, their personal possessions, furniture and any tools used in their jobs. (Note: if you’re seriously thinking about filing for a chapter 7 bankruptcy, make sure you read up on the laws in your state so you will know exactly which assets you will be permitted to keep.)

Your 401(k)

Your 401(k) is safe in a chapter 7 bankruptcy. Some people think that this is unfair as you would be allowed to get rid of all of the bad (your debts) but keep all of the good – your retirement savings. But a 401(k) is treated as a protected asset – whether that’s good or bad. However, you must keep the money in the 401(k). It’s protected only so long as it stays there. If you were to take the money out of your retirement account, it would become an unprotected asset and can be seized.

A DIY bankruptcy

It is possible that you could do the bankruptcy yourself – especially if you do not own a house. There are bankruptcy kits available online that were developed by companies such as Nolo.com that make it relatively easy to handle the procedure yourself. However, it will take you a lot of time to compile and submit the documents required. You’ll need to get forms notarized, contact your creditors and send all of your documentation to the bankruptcy court. You may also have to appear before the court to have your case heard.

$500 or less

As you can see, filing for bankruptcy yourself can be a complicated and time-consuming task. This is why many people hire an attorney to handle their bankruptcies. Plus, it’s usually possible to hire a bankruptcy attorney for $500 or less. This could be a very good investment when you compare it with the thousands of dollars of debt that would be eliminated.

Ready To File For Bankruptcy? Better Read This First

petition to file for bankruptcySome financial gurus call bankruptcy the “nuclear” option because they consider it to be the ultimate way to get rid of debt and get a fresh start on a person’s financial life. There are two types of personal bankruptcies, a chapter 7 and a chapter 13. But a chapter 7 is the most popular one and is considered to be the “nuclear” alternative.

The differences

Without getting too technical, the major difference between a chapter 7 bankruptcy and a chapter 13 is that a chapter 7 is a “liquidation” bankruptcy while a chapter 13 is a “reorganization” bankruptcy. It’s goal is to give you time to reorganize you finances and pay off your creditors. In comparison a chapter 7’s objective is to get rid of most, if not all, of your debts to get you a “fresh start.”

You could lose assets

If you choose a chapter 7 bankruptcy, you could lose some of your assets. This is because your bankruptcy judge has the power to take over your assets and liquidate them or turn them into cash that can be used to pay off your creditors. However, that’s more in theory than in practice. Here’s why. In a chapter 7 bankruptcy you’re allowed to “exempt” some of your assets. For example, you will be allowed to exempt some amount of the equity in your home and your automobile(s). This varies from state to state. In some states you might be allowed to exempt only $10,000 of equity in your house while in others you might be able to exempt up to $50,000 in equity. Of course, if you have no equity you will be allowed to keep your home with no arguments.

Your automobile

You should also be able to keep you vehicle, again depending on how much equity you have in it. This also varies depending on where you live but a good rule of thumb is that you should be able to exempt your automobile if you have $3500 or less in equity. In case you’re wondering, equity in an automobile is the difference between what it’s worth and how much you owe on it.

Secured debts

Not even a chapter 7 bankruptcy will discharge your secured debts as well as some of your unsecured ones. Your secured debts include mortgages and car loans. The unsecured debts that won’t be discharged are student loan debts, alimony and child support, taxes owed, and debts obtained through fraud.

You may not qualify

Another important thing to understand about a chapter 7 bankruptcy is that you might not qualify for one. The way the process works is that after you file for bankruptcy, the bankruptcy judge reviews your finances and decides whether or not you should be allowed to discharge your debts. If not, you will be automatically moved to a chapter 13 and required to pay back most of your debts.

The consequences of a chapter 7 bankruptcy

While a chapter 7 bankruptcy will give you a “fresh start,” it does have serious consequences. For example, a chapter 7 bankruptcy will stay in your credit report for either seven or 10 years (depending on the credit reporting bureau). This is seven or 10 years during which time you will have a hard time getting new credit. In fact, you may not be able to get any credit at all for the first two or three years after your bankruptcy.

It could cost you 200 points

Also, it is estimated a bankruptcy will lower your credit score by 200 points. If you had a reasonably good score of, say, 650 before your bankruptcy, you would have a bad score of 450 after the bankruptcy. A score this low could keep you from getting a mortgage or auto loan and might even affect the cost of your auto insurance.

Think before you file

A bankruptcy can either be a blessing or a curse – depending on your financial circumstances. You need to really weigh the plusses and minuses before you file to make sure you’re making the right decision.

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