Bankruptcy should always be the remedy of last resort.  Accordingly, there are several factors that must be considered before you choose to address your debts with bankruptcy or attempt to negotiate them instead.  When you have overwhelming debt, you have the choice to file a Chapter 7 debt discharge, Chapter 13 bankruptcy payment plan or purse debt negotiation.  Which option you choose will depend first upon your financial situation, your income and your assets.  If 2 or all options are available to you, the option you choose will depend upon how you want your credit to read and how long you wish to take to deal with your debt.  An experienced bankruptcy attorney can help you choose the best debt resolution plan for you.

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Amount of Control.  If  you choose to negotiate your debt, you maintain some control over the order in which you address your various debts, the terms of payment and the amount offered. You are able to retain assets which you would otherwise have to relinquish in a Chapter 7 and you would not be subject to a strict payment plan as in a Chapter 13.

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Ability to File Bankruptcy.  If you have significant assets which are not protected by exemptions, you are significantly behind on payments for a house or car that you would like to keep, or you do not meet the Means Test requirements, then you would not qualify for a Chapter 7 Bankruptcy but could consider a Chapter 13 Bankruptcy.  However, a Chapter 13 Bankruptccy, known as "the wage earner's plan", requires that you have a steady income and may require that you pay more per month toward the plan than you think you could afford.

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Post Resolution Affects.  A Chapter 7 Bankruptcy remains on your credit report for 10 years but you no longer have to worry about the debts after your discharge.  A Chapter 13 Bankruptcy remains on your credit report for 7 years after the date of filing but takes 3 to 5 years to complete.  Many employers will disregard potential employees with a bankruptcy history.  Additionally, a bankruptcy could effect your ability to obtain various licenses in professions where financial responsibility is important such as law, real estate, or financial management.  Resolving your debts through negotiation will appear differently on your credit report as "settled" or "paid".  However, the delinquent accounts on your credit report will continue to appear delinquent until they have been settled or paid.

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Amount of Debt and Ability to Pay.  If your debt is less than $10,000, then filing for bankruptcy can be a rather extreme choice.  Bankruptcy is better left as a solution of last resort because of the post resolution affects.  Conversely, if you are living paycheck to paycheck, you will not have extra money left over to negotiate debts and will be forced to file a Chapter 7 Bankruptcy.

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Your Age and Source of Income.  If you are older, have no assets excluding your home and are living on social security, you may be considered what is known as "judgement proof" meaning that even if a judgment is entered against you for anything not related to your home, there is no way for the creditor to force you to pay the debt.  Depending upon how you choose to address the debt, your "judgment proof" status affords you leverage in negotiating the amount of a debt as well as a payment plan.  If you are younger, you may not wish to have a bankruptcy on your credit report at a time when you are starting your credit life and looking to buy an automobile, rent an apartment, get married or buy a home.

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DEBT NEGOTIATION.  Debt negotiation allows you to customize the handling of each of your debts depending upon the urgency caused by the need for action, your future intended purchases and your income ability.  With debt negotiation, you may tackle one, a few or all of your debts at the same time depending upon your income ability.  Understand that your income ability is the amount of money you realistically have left over after necessary expenses, excluding credit card payments and personal unsecured loans.  The greater your ability to make lump sum settlement payments, the greater your ability to obtain better reductions on the debt.  Your credit will continue to decrease due to late and non-payments but it will eventually come back up as you settle your debts.  One major benefit is that you will not have a bankruptcy on your credit report.  Additionally, the payment plans will be according to your chosen schedule, dictated by your income available after necessary expenses.  When you exclude payment of credit cards and unsecured personal loans, you will be surprise how much you have left over to negotiate settlements.  Debt negotiation may take longer than a Chapter 7 but debt negotiation could also take less time than a Chapter 13.  You may not qualify for a Chapter 7 due to your income or assets.  Additionally, if you file a Chapter 13, it could last 5 years, requiring you to apply any income left over after necessary expenses toward payment of all of your unsecured credit card and personal loan debts.  In this regard, a debt negotiation plan will allow you more control and might even result in paying less than you would in a Chapter 13 bankruptcy.  You could also choose a debt negotiation plan and, if it too overwhelming after trying to resolve your debts, you could then elect to file a Chapter 7 or Chapter 13 as your income verses Means Test permits.

 

CHAPTER 7.  If you satisfy the Means Test and all of your assets are protected by allowed exemptions, Chapter 7 is ideal in dispensing with your unsecured debt.  A Chapter 7 usually takes approximately  3 to 4 months but requires you to do a lot of work in accumulating your necessary financial documents and information needed to prepare the petition and initial schedules.  11 USC § 521.  However, a bankruptcy will be reported on your credit report for 10 years and accounts that were included in the Chapter 7 will remain on your credit reports for 7 to 10 years. 15 USC § 1681c .    Additionally, you will have to wait 8 years from the filing date to be able to file Chapter 7 again although you will only have to wait 4 years to file a Chapter 13.  11 USC § 727(a)(8) .  Your credit will begin to increase slowly after your Chapter 7 discharge. 

 

CHAPTER 13.  Chapter 13 is usually chosen when your income is too high according to the Means Test or you wish to protect assets not protected by an exemption.  Chapter 13 is also used to halt repossessions or foreclosures.  If your income is above the state median income, your plan will last 5 years. 11 USC § 1322(d). If your income is below the state median income, your plan will last 3 years.  Your Chapter 13 bankruptcy will appear on your credit report for 7 years.  After an initial credit score dip after filing, debts included in the payment plan will help improve your credit score if you continue to make on-time payments.  In this instance, your included debts should report as a zero balance but indicate that they are part of the bankruptcy.  Compared to Chapter 7, Chapter 13 is considered less damaging because it demonstrates a proactive effort to repay debts.