you licensed to offer your services in my state? You should only work with an agency licensed to operate in your state.
What are your counselors’ qualifications? Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained? Try to use an organization whose counselors are trained by a nonaffiliated party.
What assurance do I have that information about me will be kept confidential and secure? This information includes your address, phone number, and financial information. Reputable agencies provide clearly written privacy policies.
How are your employees compensated? Are they paid more if I sign up for certain services, if I pay a fee, or if I make a contribution to your organization? Employees who work on an incentive basis are less likely to have your best interests in mind than those who earn a straight salary that isn’t influenced by your choices.
Considering bankruptcy
When the amount of your high-interest consumer debt relative to your annual income exceeds 25 percent, filing bankruptcy may be your best option. Like any tool, it has its pros and cons.
Bankruptcy’s potential advantages include the following:
Certain debts can be completely eliminated or discharged. Debts that typically can be discharged include credit card, medical, auto, utilities, and rent. Eliminating your debt also allows you to start working toward your financial goals, such as saving to purchase a home or toward retirement. Depending on the amount of outstanding debt you have relative to your income, you may need a decade or more to pay it all off.Debts that may not be canceled through bankruptcy generally include child support, alimony, student loans, taxes, and court-ordered damages (for example, drunk-driving settlements).
Certain assets are protected by bankruptcy. In every state, you can retain certain property and assets when you file for bankruptcy. Most states allow you to protect a certain amount of home equity; some states allow you to keep all of your home equity regardless of its value. Additionally, you’re allowed to retain some other types and amounts of personal property and assets. For example, most states allow you to retain household furnishings, clothing, pensions, and money in retirement accounts. So don’t empty your retirement accounts or sell off personal possessions to pay debts unless you’re absolutely sure that you won’t be filing bankruptcy.
Filing bankruptcy, needless to say, has it downsides, including the following:
It appears on your credit report for up to ten years. As a result, you’ll have difficulty obtaining credit, especially in the years immediately following your filing. (You may be able to obtain a secured credit card, which requires you to deposit money in a bank account equal to the credit limit on your credit card.) However, if you already have problems on your credit report (because of late payments or a failure to pay previous debts), damage has already been done. And without savings, you’re probably not going to be making major purchases (such as a home) in the next several years anyway.
It incurs significant court filing and legal fees. These can easily exceed $1,000, especially in higher cost-of-living areas.
It can cause emotional stress. Admitting that your personal income can’t keep pace with your debt obligations is a painful thing to do. Although filing bankruptcy clears the decks of debt and gives you a fresh financial start, feeling a profound sense of failure (and sometimes shame) is common.
It becomes part of the public record. Another part of the emotional side of filing bankruptcy is that you must open your personal financial affairs to court scrutiny and court control during the several months it takes to administer a bankruptcy. A court-appointed bankruptcy trustee oversees your case and tries to recover as much of your property as possible to satisfy the creditors — those to whom you owe money.
Deciphering the bankruptcy laws
If you want to have a leisurely afternoon read, then the bankruptcy laws are definitely not for you. I’m here to help clarify the two forms of personal bankruptcy in case you’re considering taking this action:
Chapter 7: Chapter 7 allows you to discharge or cancel certain debts. This form of bankruptcy makes the most sense when you have significant debts that you’re legally allowed to cancel.
Chapter 13: Chapter 13 comes up with a repayment schedule that requires you to pay your debts over several years. Chapter 13 stays on your credit record (just like Chapter 7), but it doesn’t eliminate debt, so its value is limited — usually to dealing with debts like taxes that can’t be discharged through bankruptcy. Chapter 13 can keep creditors at bay until a repayment schedule is worked out in the courts.
The Bankruptcy Abuse and Prevention Act of 2005 contains the elements of personal bankruptcy laws currently in effect, which include the following:
Required counseling: Before filing for bankruptcy, individuals are mandated to complete credit counseling, the purpose of which is to explore your options for dealing with debt, including (but not limited to) bankruptcy and developing a debt repayment plan.To actually have debts discharged through bankruptcy, the law requires a second type of counseling called “debtor education.” All credit counseling and debtor education must be completed by an approved organization on the U.S. Trustee’s website (www.usdoj.gov/ust). Click the link “Credit Counseling & Debtor Education.”
Means testing: Some high-income earners are precluded from filing the form of bankruptcy that actually discharges debts (Chapter 7 bankruptcy) and instead are forced to use the form of bankruptcy that involves a repayment plan (Chapter 13 bankruptcy). The law does allow for differences in income by making adjustments based on your state of residence and family size. The expense side of the equation is considered as well, and allowances are determined by county and metropolitan area. For more information, click the “Means Testing Information” link on the U.S. Trustee’s website (www.usdoj.gov/ust) under the link for “Credit Counseling & Debtor Education.”
Rules to prevent people from moving to take advantage of a more-lenient state’s bankruptcy laws: Individual states have their own provisions for how much personal property and home equity you can keep. Prior to the passage of the 2005 laws, in some cases, soon before filing bankruptcy, people actually moved to a state that allowed them to keep more. Under the new law, you must live in a state for at least two years before filing bankruptcy in that state and using that state’s personal-property exemptions. To use a given state’s homestead exemption, which dictates how much home equity you may protect, you must have lived in that state for at least 40 months.
Obtaining sound bankruptcy advice
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