Bankruptcy or Debt Negotiation – Both Explained – What To Do To Get Out Of Debt

     You are in debt. You cannot pay the debt.  The interest rates on your credit card and other debts are high and rising. Your credit is damaged, and you are having trouble qualifying for loans. Your creditors are calling you incessantly. Now what?

     Some people contemplate filing for bankruptcy. However, filing for bankruptcy became an unattractive or unattainable option for many when the bankruptcy laws changed in 2005. Chapter 7 bankruptcy, which allows for “wiping out” certain debts, is considerably less available. For those people who no longer qualify to file for Chapter 7, can consider the only other bankruptcy option, a Chapter 13 filing, which requires repayment of debt. 

     Some of the changes in the bankruptcy law include the following:

     Now, one can only file for bankruptcy under Chapter 7 if that person meets a qualifying test. The Court will utilize a formula to determine if a person can afford to pay 25 percent of certain debts after exempting certain necessary expenses (a Chapter 13 plan). The Court will also compare the filer’s income to that person’s state’s median income.  The Court can consider special circumstances in allowing people who do not meet the qualifying test to file for Chapter 7, but the Court has less discretion in making such decisions. 

     Further, filers must meet with an approved credit counselor in the six months preceding the application for bankruptcy. Filers must also attend money management classes at their expense before debts are discharged. 

     Also, hiring an attorney is now more financially difficult. The new law puts a higher burden on attorneys filing bankruptcy papers. They are subject to fines if they file documents with inaccurate information. Therefore, attorneys have to spend more time verifying information. As a result of the additional work and potential liability, attorney’s fees are higher. Some people will not be able to afford the attorney retainer fee.

     It is also more likely under the new law that a filer’s assets will be sold by the bankruptcy trustee. Property is valued at the replacement cost instead of auction value, and less people will be able to use their state’s exemption laws, depending on their length of residency. 

     The law also made filing Chapter 13 bankruptcy less desirable. Under Chapter 13, filers have to pay their debts over time with a portion of their disposable income (money left after paying living expenses). With the new formula, fewer expenses are considered living expenses, and more income is considered disposable. That means filers will have less money on which to live. 

     One thing that has not changed about the bankruptcy laws is the fact that a bankruptcy can negatively impact your credit for up to ten years. 

     Debt negotiation is an alternative to bankruptcy. Debt negotiation allows debtors to settle unsecured debts with willing creditors for significantly less than the debtor owes. Debt negotiation is available to debtors who have stopped paying unsecured debts that they have accrued in good faith.

     When one hires an attorney to negotiate debt, the negotiation does not impact credit. Your credit is impacted, however, by failing to pay on your debts. The impact is, of course, less severe than a bankruptcy filing and, with debt negotiation, most people can be free of their negotiated debt within two to three years. A debt negotiating attorney can also stop the creditors’ harassing calls by issuing cease and desist letters. Creditors cannot bother you once you are represented by counsel. 

     When you are unable to pay your debt, doing nothing is not a good option. Before deciding whether you should file for bankruptcy or hire an attorney debt negotiator, speak to professionals in both fields. Understand your options before paving your path to a freed-up financial future.