With one out of every seven households in the US today either in the process of bankruptcy proceedings or having just completed bankruptcy proceedings, it has become vital that anyone who is currently experiencing debt management problems understands exactly what their debt relief options are. Here we discuss debt relief, law, and your available options.
The first thing to understand is that bankruptcy proceedings are usually the last course of action that creditors will take when their debtors have not been willing to try and repay their loans. In short, bankruptcy is expensive, and there is no guarantee that the creditors will get repaid their money – usually they have to take what is commonly called a “hair-cut”, a reduction, on their debt amount. So, if you are only at the beginning of your debt management worries, then likely you’ll still have some way to go before bankruptcy becomes a real issue – regardless of what your creditors may be telling you otherwise.
Credit Counseling and Debt Management Plan
As with most things in life, when we have a problem it usually helpful if we take ourselves off to see a specialist and ask them for some advice on how to overcome this problem. In the case of debt management issues, this person is called a credit counselor, and he or she will usually put together a debt management plan with your creditors under which you’ll agree to make periodic payments to creditors in return for your creditors agreeing not to take any further action against you. This process is known as a debt consolidation – and in most case you’ll be asked to sign a legally binding debt consolidation agreement. Also, over the prolonged period that it takes you to repay the debt under the debt management plan, it is likely that the credit counselor will remain as your “debt/creditor agent”.
If your debt management problems continue to exist, and it becomes apparent that your plan is not going to be successful, then the time may well come when your creditors – fearing that you’ll have no assets left from which to pay them – may take bankruptcy action against you.
However, from a legal perspective, bankruptcy should be something which you try to avoid at all costs. If for no other reason than the fact that the stigma of bankruptcy last a long time – 10 years! During this time it will be very hard for you to obtain loans, housing loans, and car loans at anything close to market rates.
That said, if bankruptcy proceedings are unavoidable, then there are two types of person bankruptcy: chapter 7 and chapter 13. Both of these are required to be filed in federal court, both will require court fees to be paid, and both come with expensive legal costs.
Essentially the difference between chapter 13 and chapter 7 bankruptcy proceedings is that chapter 13 proceedings are effectively court sanctioned debt management plans. In other words, although you are legally bankrupt, you still get to keep the house, car, or any other assets you may have. You then have to try and pay-off all of the debt under the plan within a period of 3 to 5 years; following which you’ll be ‘discharged’ from bankruptcy (in much the same way as you are ‘discharged from hospital when you are physically sick).
Chapter 7 bankruptcy, on the other hand, is where all of your assets – apart from anything which you can show you need for work, such as your tools, etc. – are liquidated/sold and the proceeds are turned over to your creditors in repayment of your debt. Now here’s the kick: even though all of your assets have been liquidated/sold, you’ll still not be discharged from chapter 7 bankruptcy proceedings for a minimum of 6 years following the date your creditors receive the monies from the liquidation sale. So, this process is very punitive.
Aside from debt management programs, chapter 7 and chapter 13 bankruptcy proceedings, you could also consider entering into contractual one-on-one agreements with your creditors. Here, in essence what you are doing is not so much admitting you have a debt problem, but rather asking your creditors to renegotiate the terms of your repayment. Of the three types of debt relief, this last one is most probably the most preferable to debtors – and the least likely one you’ll get.
Whatever the case may be, most states these days have specialist debt relief counselors, so make sure you talk things through with one of these before embarking on a process that could effect your life for a very long time to come.