Filing a personal bankruptcy petition should be a debtor’s last resort. Not only is doing so complicated, time-consuming, and for some, emotionally trying, it will wreck your credit rating for many years to come. It could even show up on a background check conducted by a prospective employer.
Negotiate a Settlement
It’s possible to negotiate a settlement on mortgage and auto loans, but because these are loans secured by the value of the home or car you purchased, the creditor can simply repossess the asset to recoup its costs. The lender might not want to go to the trouble of doing so far any number of reasons, but your negotiating leverage is limited. Credit card debt is different in that it’s unsecured. None of your assets were used as collateral. It’s sometimes possible to negotiate a reduced interest rate or lower monthly payment through a hardship or workout plan to settle the debt. In some cases, debtors have been able to make a lump sum payment for less than what they owe.
If you find the idea of negotiating with a creditor daunting, there are credit-counseling agencies that will do so on your behalf. They can offer advice on what options are available to you, whether it’s negotiating with creditors, working on your budget, some kind of debt-consolidation loan, or, as a last resort, filing for bankruptcy. If you go this route, just make sure you do your homework to find a reputable agency.
Personal bankruptcy filings proceed along one of two lines. A Chapter 7 bankruptcy, often referred to as a “liquidation,” is as the name implies a process whereby the debtor turns over everything that the law requires to obtain a discharge for debts incurred. Some assets are considered exempt from liquidation. Those necessary for a debtor to continue to make a living, such as a car, can be exempt.
A Chapter 13 bankruptcy, is often referred to as a reorganization. Under Chapter 13, a debtor works with his creditors and the court to restructure his debt. After developing a repayment plan based on realistic assumptions, a debtor resumes making payments to the court, which in turn makes payments to creditors on his behalf. A Chapter 13 filing allows a petitioner to more quickly rebuild his credit rating.
The objective of bankruptcy law is straightforward. It’s more to society’s advantage to create an opportunity for a person to contribute to economic growth than it is to ensure that he will never again be able to do so. When all else fails, personal bankruptcy offers the debtor an opportunity for a fresh start.