Bankruptcy Alternatives Blog

Should Bankruptcy Be Your Last Option?

People sometimes go through extreme economic turmoil. They find themselves surrounded with huge amount of debts and fail to handle the outstanding amounts. During such a financial upheaval, most people take up bankruptcy as the best option to get release from their debt afflictions. This helps them to start with fresh endeavour to restore a sound financial condition.

Filing bankruptcy is a very complicated process. There are certain new laws which has made filing bankruptcy even more intricate. According to the new law, filing for chapter 7 bankruptcy is only possible if you have no monthly income. When you file for chapter 7 bankruptcy, the court seizes some of your assets in order to sell it and pay back your debts. These seized assets are called non-exempt property. The rest of the property which you are left with you are called exempt property.

If you have a minimum amount of income, then you are not eligible for the chapter 7 bankruptcy. Instead you will have to file it under the chapter 13. In chapter13, you will not be required to surrender your property to the court to repay your debts. The reason is that, chapter 13 offers a repayment plan suggesting how to repay your debts to your creditors easily. You can utilize your monthly income and other monetary resources to pay off your debts.

Filing for bankruptcy seems to be the easiest way to get relief from debt clutches. Nevertheless, there are certain drawbacks that you can experience after filing for bankruptcy. It will affect your credit report adversely which will force you into several years of difficulties. Owing to this negative credit remarks you may not receive loans or credit cards further. Hence, filing bankruptcy should be the last option to get relief from prevailing debts.

Alternatives to Bankruptcy

If you want to avoid filing for bankruptcy and yet want to repay your debts, there are some alternatives. You can opt for a debt settlement program. As soon as you enroll with a debt settlement company, they negotiate the debt amount including the interest rate with your creditors on your behalf. You are then only required to pay the reduced amount to the settlement company and they will disburse the amount to your creditors.

Debt consolidation is another way to rule out your debts. When you enroll with a debt settlement company, you get a single loan so as to recompense your all other debts. Both of the above debt relief options will bear a negative influence in your credit report. However, it will be still better than the detrimental and harmful effects of filing bankruptcy.

Chapter 13 Wage Earner Plans, Financial Counseling, and Consumer Proposals – Which is a better bankruptcy alternative as far as my credit report is co

It is a common misconception that financial counseling, or consumer credit counseling, is much better than a Chapter 13 Wage Earner Plan (in the United States) or a consumer proposal (in Canada) as far as your credit score is concerned.

In fact, they are all about the same.

Each of these options will have a negative impact on your credit report.

To prove this point, we went to the web site for Equifax, the largest credit reporting agency in the world. Equifax explains that information in the Public Records section of your credit report remains on your credit report for 7 years.

What is a public record? Here is the definition of a public record from Equifax:

The ‘Public Records’ section reports the presence of several types of items on your credit report, including accounts that have been turned over to a collection agency, matters of public record, bankruptcies, and similar items. …The different types of items that may appear in the ‘Public Records’ section of your Equifax Credit Report™ are:

Bankruptcy

A legal agreement in which a consumer is declared fully or partially unable to repay debts. In return for full or partial release from those debts, the consumer may sacrifice some property or agree to a payment plan. There are two different types of bankruptcy for consumers: Chapter 7 and Chapter 13.

Financial Counseling

A voluntary method of debt restructuring in which a person makes a lump sum payment to a financial counseling agency who distributes the funds to creditors. Consumers in financial counseling may have an arrangement to pay all or part of their consolidated debt.

Equifax goes on to state that:

Chapters 7, 11, and non-discharged or dismissed chapters 12 and 13 remain on file for 10 years from the date filed

Accounts paid as agreed remain on file for up to 10 years from the date of last activity (DLA)

In other words, whether you do consumer credit counseling or a Chapter 13 Wage Earner Plan the note on your credit report stating that you have filed the procedure is likely to remain on your credit report for up to 10 years. So which option should you choose?

Since your credit report is likely to be the same in either case, you should use other factors to decide on the correct option for you. In most cases a Chapter 13 Wage Earner Plan results in you paying less than the full amount of your debts owing, and so that may be the preferable option. However, professional advice is recommended, so consult a bankruptcy attorney or credit counselor to help you decide which bankruptcy alternative is right for you.

Chapter 13 Wage Earner Plans: A Great Bankruptcy Alternative, or a Trap?

A Chapter 13 Wage Earner Plan is a great alternative to Chapter 7 bankruptcy, but only for certain people.

First, you must be a resident of the United States to file under Chapter 13. Canadian residents should consider a consumer proposal.

Next, you must determine if you qualify for Chapter 13. (Because a Chapter 13 bankruptcy is paid for out of the wages you earn each month, Chapter 13 is also known as a Wage Earner Plan).

Since new federal bankruptcy rules became law in October, 2005, anyone who has gross income higher than the median income for their state is required to file bankruptcy under Chapter 13, instead of under Chapter 7. Do not fall into the trap of thinking you can file under Chapter 7; Chapter 13 may be your only option.

Before deciding on a Chapter 13 Wage Earner Plan, consider your other options.

Since a Chapter 13 plan will typically last for five years, you should explore any options that can be completed in less than five years. For example, if you can get a debt consolidation loan and repay it in three years, a debt consolidation loan is probably a better option for you than a five year Chapter 13 Wage Earner Plan.

If you don’t qualify for a debt consolidation loan, but you want to avoid the court process, and can afford to pay your debts in full over a three to five year period, credit counseling credit counseling may also be an option.

Finally, you may be able to cut your expenses and pay off your debts on your own.

A Chapter 13 Wage Earner Plan is designed to give you a fresh start, but remember, it’s a five year plan, and that can be a trap. Only agree to a five year repayment plan if you are confident that you can afford to make the payments.