No one wants to run out on a valid debt, but sometimes things happen that make it impossible to make payments. In the best of all worlds, you could go to creditors, explain the situation, and they would let you put off making payments until you got back on your feet.
But while some creditors might be willing to cooperate, given the promise of full payment at a later date, some will not. That leaves you with some tough choices:
• Filing Chapter 7 Bankruptcy
• Filing Chapter 13 Bankruptcy
• Letting your debts go to collection
Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, almost anyone could file Chapter 7 and wipe the slate clean. The bankruptcy put a blot on their credit report and lowered their FICO credit score, but they no longer owed the debt.
Now it’s a bit tougher. If your income is greater than the state median income, your motion to file Chapter 7 will be dismissed and you will have to file Chapter 13. That means you’ll have to repay the debts over time.
A Chapter 7 bankruptcy dissolves all debts that legally qualify for the process – meaning that almost all liabilities are erased. You can’t erase a debt to the IRS – so don’t count on this system to get rid of overdue income taxes.
Chapter 7 filings remain on your credit report for 10 years, so this move is not one to take without due consideration.
Under Chapter 13, you must pay off at least a portion of your debts over time. For 5 years you’ll pay money to a court appointed Trustee, who will disperse the funds to your creditors. This option is usually for people who have a steady income.
Be aware that certain restrictions will apply to your life. You won’t be able to go out and buy a new car, that’s for sure! This stays on your credit report for 7 years.
The third option might be the best in some cases: Letting your debts go to collection.
When your original creditor decides that collecting from you is a lost cause, it will sell your debt to a collection agency for pennies on the dollar. The collection agency will, of course, attempt to get the full balance from you, but you can negotiate a lesser balance agreement. Even when you pay far less than the original debt, the collection agency makes money because they paid so little for the debt.
The future will see fewer people filing Chapter 7, if for no other reason than the income limitations. It should see fewer people overall filing, because of the life restrictions imposed under Chapter 13.
Always pay your debts if you can, but if you can’t, consider letting them go to collection as an alternative to bankruptcy.
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