There’s an old song about “know when to hold ‘em, know when to fold ‘em”. While that was about the game of poker, you could say the same thing about being heavily in debt. You need to know when to hold ‘em (try to pay them off) and when to fold ‘em by filing for bankruptcy.
How do you know when the time has come?
If debt collectors are harassing you, if you can’t see any way to pay off your debts, if you’re facing wage garnishment or a home foreclosure, it may be time to file for bankruptcy. Of course, this is a decision only you can make as there is no hard and fast rules you could use to determine when it’s time to file.
A chapter 7 bankruptcy
If you do decide it’s time to file for bankruptcy, you’ll probably choose a chapter 7. The alternative, a chapter 13 is really meant to help you reorganize and then pay off your debts, which is probably not your objective. However, a chapter 7 will dismiss most of your unsecured debts.
The pros of a chapter 7 bankruptcy
The major benefit or pro of a chapter 7 bankruptcy is that it will eliminate most of your unsecured debts, including medical bills, lines of credit and credit card debt. What it won’t dismiss are student loan debts, child support and alimony, and secured debts like your home mortgage or auto loans. A second pro of a chapter 7 bankruptcy is that they have become very cheap. You should be able to get a lawyer to handle one for $500 or less. For that matter, if there is no house involved, you could probably do the bankruptcy yourself. Another great benefit is that once you file for bankruptcy your creditors can no longer harass you.
It will never go away
There are unfortunately disadvantages to filing for bankruptcy. For one thing, it will stay in your credit report for either seven or 10 years, depending on the credit-reporting bureau. Second, bankruptcy is a public record that never goes away. You could be denied a job five years from now when your prospective employer discovers that you had a bankruptcy.
What you can keep and what you might lose
A chapter 7 allows you to keep at leady $15,000 equity in your house, which the court cannot touch, or up to $50,000 depending on where you live. You would be allowed to keep $3,000 of equity in your car if you file as a single person or $6,000 if you file as a couple. You would probably also be allowed to keep your personal possessions such as clothing and furniture and any tools required by your work. But if you have any other valuable possessions, they could be seized and sold to help satisfy your creditors. This means you might have to wave goodbye to that RV or boat or heirloom necklace you inherited from Aunt Gracie.
You will have to get credit counseling and meet with your creditors
Two other negatives of a chapter 7 bankruptcy are that you will have to go through credit counseling and will have to meet with your creditors. Since most lenders will not send representatives, the meeting will probably consist of you, your attorney and the bankruptcy trustee. Of course, if you don’t have an attorney, the meeting will be just you and the trustee.
Why debt settlement might be a better option
Thousands of American families have chosen debt settlement instead of filing for bankruptcy. The main reason for this is that it’s a way to pay off your creditors instead of sticking them for everything you owe. Plus, your debts will be reduced when they’re settled, which can help you become debt free in 24 to 48 months. Debt settlement will affect your credit score but it will not be as severe as if you had declared bankruptcy.