The process of deciding whether to file a bankruptcy proceeding often is very difficult. Nobody wants to file bankruptcy, whether it be under Chapter 7 or Chapter 13 of the Bankruptcy Code. A bankruptcy may have adverse credit effects and there can be other undesirable ramifications. Well then, why should someone take this important step?
The answer to that question, in my opinion, is that you should file only after considering the various alternatives. If none of these alternatives is feasible or practical for you, then filing a bankruptcy petition may be the most responsible step to take.
Warning Signs. In assessing whether or not you should seek some kind of debt relief, consider the following questions:
Do you ever use one form of credit, such as a credit card or debt consolidation loan, to make payments on other debt?
Have you taken one or more cash advances greater than $500 in the past few months to pay living expenses?
Do you ever borrow to meet regular expenses, such as food and utility bills?
Can you barely make the minimum required payment on credit cards or other debts?
Are you receiving calls or letters from creditors or collection agencies?
Are you being sued, or are your creditors threatening to sue you?
Are your wages being garnished, or are your creditors threatening a garnishment?
Are your financial problems impacting your health or relationships?
Do you owe two months’ salary or more on your credit cards?
Are you using one-quarter or more of your take-home income to pay credit card bills and personal loans (excluding mortgage payments)?
Are your revolving credit cards charged to the limit?
Have you bounced more than one check in the past year?
Are you without cash reserves?
Are you behind on house or auto payments?
Are your creditors threatening to take your car, house, or other property?
Are you behind on your taxes or do you owe the IRS?
If you answered “yes” to one or more of the preceding questions, you should consider seeking some form of debt relief. Bankruptcy, of course, offers very effective debt relief, but there are possible alternatives to filing bankruptcy.
Alternatives to Bankruptcy
Generally speaking, the chief alternatives to bankruptcy are some form of negotiation and settlement with one or more of your creditors, perhaps by making payments through a nonprofit credit counseling service. Anytime you are dealing with alternatives to bankruptcy, be sure that you do not “put all your eggs in one basket.” In other words, do not let a foreclosure sale occur or allow a judgment to be entered against you without first finding out your options under bankruptcy laws.
Nearly all large companies such as credit card issuers have limited or no resources for dealing with individual borrowers. Many of my clients relate to me that they have called and written to their creditors to attempt to work out a method of paying their debts. Most often, these people find that no matter how good their reason for wanting to work out their debts, and no matter how hard they try to pay their creditors what they can afford, the creditors simply will not “work” with them. This is because these creditors are vast bureaucracies that have no method and no personnel to deal with people on an individual basis.
There are some limited exceptions, however. If your situation is like one of the following, you may want to try to work the problem out without filing bankruptcy:
Giving in Payment. If you have one mortgage on a home or other piece of real estate and you cannot sell the property and simply wish to relieve yourself of the mortgage obligation, it is possible that you can negotiate what in Louisiana is called a “Dation en Paiement” (Giving in Payment). In other states this is called a “deed in lieu of foreclosure.” This is an agreement where you give the property to the creditor, who, in turn, releases you from the debt. This saves the mortgage company the cost of foreclosing against you and allows you to walk away from the debt without further responsibility. You can try to negotiate this on your own, or you can hire an attorney to do it for you. Generally, mortgage lenders will not agree to this arrangement unless there is some equity in the property or the property is at least worth the amount that is owed. The mortgage holder will not accept the property if there is any other debt on the property, such as a second mortgage or a judgment lien. Related to the giving in payment concept is the possibility of a “short sale.” This device, which has become increasingly popular lately, allows you to sell the real estate to a buyer for less than the full amount owed to the mortgage company. Of course, it requires the consent of the mortgage company.
It is important to note automobile lenders most often will not release you from the debt upon surrender of the vehicle. You can expect that following the surrender, the vehicle lender will seek to collect the deficiency (the amount of the debt remaining after sale of the vehicle.)
Reamortization of Past-Due Mortgage Balance. If there is a good reason why you fell behind in payments (such as temporary job loss, illness, or injury), a mortgage holder will sometimes consider adjusting the mortgage so that the past due amount is added in to the total and the term of payments is extended. The creditor will generally consider this only where your debt-to-income ratio is acceptable and there is no other mortgage debt that is in arrears.
Negotiation of a Single Debt. If there is just one (or a few) old debts you are trying to “clean up” on your credit report, it is possible that the creditor or its collection agency will be willing to settle their debts with you for significantly less than the total amount that you owe. This is usually only true of older debts, which may have been bought from the original creditor by another company . Again, you can negotiate a settlement yourself, or hire an attorney to assist you and represent your interests.
Credit Counseling Services. There are a number of nonprofit credit counseling services available in the yellow pages under “credit counseling.” These services negotiate with your creditors to the extent that they are able. Generally, they can negotiate more favorable terms only with unsecured creditors (debts for which there is no collateral), such as credit card issuers. The credit counseling service attempts to get your unsecured creditors to settle for less than the full amount of the debt that you owe, and also tries to get the creditors to give you a lower interest rate. Some credit card companies will agree to these types of terms so long as they are getting their payments through the credit counseling service. However, other creditors are simply unwilling to work with credit counseling services, and the credit counseling service has no way in which to force the creditors to work with it. To be sure that you are selecting a reputable firm, be sure to ask whether or not you will be held responsible for late charges or other fees if the service does not make their monthly distributions on time. You can also ask for references from current or former clients. You must be very careful when deciding whether to use a particular credit counseling service. There are many such agencies that are scam artists. Such agencies will charge an upfront, non-refundable, fee and will not begin paying your creditors for months. Be especially wary of those companies advertising heavily on television or radio.
“Mortgage Assistance” Companies. Unfortunately, there are a growing number of companies that send advertisements to people with pending foreclosure actions. These “mortgage assistance” companies, who get your address from the court records, promise that they can stop your foreclosure and help you avoid a bankruptcy. Please be very careful of these companies. The vast majority of the time, these companies simply prey on people who are in a desperate situation, taking advantage of your desire to keep your home and “avoid bankruptcy.” Typically, the “mortgage assistance” company will require a payment (usually one or two month’s mortgage payments) and will promise to obtain another mortgage loan to pay off your existing loan or to negotiate with your mortgage company to stop the foreclosure. They will wait until just before (unfortunately sometimes AFTER) the foreclosure sale to tell you that they were not able to help you, and that you should see a bankruptcy attorney. At that point, sometimes it is too late. You will be referred to a lawyer who has a good “working relationship” with the company, to whom you will need to pay even more money.
“Credit Repair” Companies. Unfortunately, there are companies that claim to offer an alternative to bankruptcy but which actually take the dangerous step of advising people to stop paying their creditors and pay the “credit repair’ company instead. These companies claim that they can negotiate significant reductions or discounts on debts. What they actually do is charge fees and costs for themselves off the top. Then when their customers are seriously behind they may contact the creditors and attempt to negotiate reductions. The creditors may or may agree to the reductions. Many times it is too late when one of the creditors files a lawsuit against the customer before the negotiation is completed. Then the company recommends that the debtor files for bankruptcy. Unlike, bankruptcy “credit repair” companies do not shield their customers with the legal protection of the courts.
If you choose to use one of these firms, be sure to ask for references of clients that for whom the company has been successful, and check these references. Also, do not put all of your hopes on these types of services because the strategies that they practice are inherently risky and unlike bankruptcy require the consent and cooperation of the creditors.
Of course, often it is not possible to satisfactorily negotiate a settlement with your creditors. Perhaps your credit card debt or other unsecured debt is overwhelming, with no reasonable prospect of ever paying it back. In this situation, the most responsible step to take for you and your family may be to obtain a financial “fresh start” through a Chapter 7 Bankruptcy . Or, if your mortgage company has started a foreclosure of your home or your vehicle has been seized, the possibility of working this out with your creditor is very slim. In this case, you will have to file a Chapter 13 Bankruptcy to save your property.
Should I File Under Chapter 7 or Chapter 13?
You must ultimately decide for yourself whether filing bankruptcy is the proper action to take, and if so, which Chapter is better for you. Some of the factors to consider are as follows:
If you are not making more money than you need for your current living expenses (you have no “disposable income”), Chapter 13 is not a realistic option.
Chapter 7 has the advantage of wiping the slate clean and enabling you to embark on your “fresh start” immediately. With Chapter 13 you will be making payments for three to five years, during which time you will be on a “financial treadmill,” unable to borrow without court approval.
If you have a particular asset that you want to keep and that is valued above the allowable exemption, then Chapter 13 may be the only alternative. For example, if you own a house with significantly more than $25,000.00 in equity and you don’t want to lose it, Chapter 7 probably will not work.
If you are trying to ward off a repossession or a foreclosure, Chapter 7 will not help you, and you will need to file a Chapter 13.
If your debts are primarily consumer debts, and if your budget reveals that after filing bankruptcy your income substantially exceeds your expenses, it is possible that the United States Trustee could file a motion to dismiss the Chapter 7 case for “substantial abuse.” In such a case Chapter 13 may be the better alternative.
Whatever the situation that you are struggling with, I hope that the information in my website will be helpful to you. If you wish to discuss your situation with me, I would be pleased to do so.
Nothing contained herein should be construed to constitute advice for your personal situation. Furthermore, this is intended as a peripheral glance at the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws. Whether or not you should file a Chapter 7 or Chapter 13 bankruptcy, or seek any other type of relief, will vary depending on your personal situation. This decision should only be made after careful consideration and analysis, and after consultation with a professional. The information regarding bankruptcy law you see here may contain information and rules peculiar to the Eastern District of Louisiana. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.