Our nation’s household debt is, once again, beginning to climb. In Q3 2016, household debt totaled 12.35 trillion, very close to the record high of $12.67 trillion in 2008. In the past year, credit card balances across the country increased by $18 billion to $747 billion, according to a report published by the Federal Reserve Bank of New York. And 7.1 percent of those balances were 90 or more days delinquent, says the same report.
What does this mean? If you have debt you can’t pay, you’re just one of millions of Americans in the same situation. And you’re probably not alone in considering bankruptcy as your only option, either.
From job loss to illness, daily overspending or emergency expenses, all it takes is one incident to send someone from living in comfort in the middle class to drowning in debt. It can quickly spiral out of control and you may not realize you have options.
Beware of Enticing Advertisements
If you have more than $10,000 in unsecured debt, you may be receiving a number of advertisements in the mail. Or maybe you hear them on the radio or see them on the Internet and think they could solve your debt problems. These ads claim they can help you:
Dig deeper and you may discover these ads suggest you file for bankruptcy. But bankruptcy may not be the get-out-of-debt-free card you hope it is. Bankruptcy:
Alternatives to Bankruptcy
Before you consider this long-term solution to get out of debt, consider the alternatives.
Credit counseling – A credit counseling agency [link to Solvable article] can help you to create a debt management plan (DMP), negotiate a payment arrangement with your creditors on your behalf, and help you get out of debt within about five years.
Some not-for-profit credit counseling agencies will not charge for the service, but you’ll be responsible to make payments into a third-party account monthly. The credit counseling agency then uses that money to pay off your creditors according to the terms of the agreement.
Debt settlement – A debt settlement resolves your debt. [link to Solvable article] This means you can pay off your unsecured debt for 10 to 60 percent of the original amount. You can get help from a debt settlement agency or negotiate with your creditors on your own.
Second mortgage or home equity line of credit – If you are certain your financial situation will improve and your credit is still in good standing, a second mortgage, home equity loan, or home equity line of credit (HELOC) offers a way to consolidate your high-interest debt into one lower interest loan payment.
Because these loans use your home as collateral, defaulting could mean foreclosure. If you can’t pay you could lose your house. You want to think carefully, proceed with caution, and know you can make the monthly payments before taking this step.
Is Bankruptcy Your Only Answer?
If your financial situation isn’t improving soon, perhaps due to illness, divorce, or extended unemployment, it may be time to consider bankruptcy.
There is nothing to be ashamed of. But you’ll want to find an attorney you can trust to guide you through the process.
Which Type of Bankruptcy Is Right For You?
The U.S. government offers two primary types of bankruptcy filings: Chapter 13 and Chapter 7.
Let’s look at the two different types of bankruptcy, keeping in mind that Chapter 13, which does not eliminate all your debt, is the more common type today.
Chapter 7 Bankruptcy – If you file for Chapter 7 bankruptcy get ready to make some serious lifestyle changes. The government requires the sale of many of your assets. Exempt property may include:
The property may be sold by the courts or turned over to your creditors.
You’ll need to satisfy maximum income requirements for your state(called a “means test”) to qualify. You can only declare Chapter 7 bankruptcy once every eight years.
Chapter 13 Bankruptcy – If you have a steady income but can’t pay off your debt and also afford to live, Chapter 13 bankruptcy permits you to keep property, such as a mortgaged house, a car, and household belongings, which might be sold in a Chapter 7 bankruptcy.
The court will approve a repayment plan, and you’ll use your income to pay off your debts over three to five years.
A Chapter 13 bankruptcy is similar to a debt management plan, except it stays on your credit report for 10 years, requires legal fees and court proceedings, and you may not be able to keep a mortgaged property if you haven’t made on-time payments.
What You Should Know Before Filing Bankruptcy
Keep these facts in mind before filing:
Bankruptcy: The Solution for You?
Bankruptcy can help you manage unsecured debts, stop foreclosures or repossessions, and halt debt collector calls.
Before you file for bankruptcy, you’re required to receive credit counseling. The credit counseling agency can help determine if a debt repayment plan is a better solution for you.
Because of its long-term consequences, the stress of filing, and the stringent requirements, bankruptcy should be a last resort after you’ve explored other options to get out of debt.