Each of these options, however difficult, can offer you protection and an eventual return to normalcy. The best choice for you depends on your current financial situation and your earning expectations for the immediate future.
Individuals usually choose one of two bankruptcy filing methods: Chapter 7 and Chapter 13. Chapter 7 bankruptcy works best for people who do not own property or valuable assets, including stocks, bonds, or mutual funds. Their household income must not exceed the state median for their family size; if it does, they must pass a separate means test. Chapter 13 bankruptcy works best for those with a regular income who will be able to follow a court-ordered payment plan for three to five years.
Settlements for less than what is owed work best for those who can hire counsel and complete an entire negotiated payment plan.
What Are the Advantages and Disadvantages of Bankruptcy?
One key advantage of bankruptcy is that when you file under any chapter, debt actions, and lawsuits against you are automatically stayed. The automatic stay will temporarily stop creditors, debt collectors, and most other parties proceeding against you from contacting you or pursuing their actions further. Among other things, this can:
- prevent utilities from being turned off for non-payment for 20 days
- avoid foreclosure on a mortgage
- halt car repossession proceedings
- end harassing calls
A significant disadvantage to any bankruptcy proceeding, however, is the damage to your credit rating. And certain debts, such as child support and most student loans, cannot be discharged in bankruptcy at all. Bankruptcy filings are public record and require notice to many parties, which, sadly, can discourage people who are ashamed of needing help.
Chapter 7 Bankruptcy
Chapter 7 is a relatively quick process that, if completed, can give you a fresh start on a new financial future. It is usually completed in six months or less. People often choose this option in response to substantial unsecured debt, such as credit card debt and medical bills, as that debt will be discharged after the bankruptcy. Once the bankruptcy is completed, you can obtain a secured credit card to help restore your credit.
However, outside of a few exempt assets—in Massachusetts, that includes your residence and certain household items—your property will have to be liquidated to repay creditors. Moreover, any co-signers you had can be pursued for the debts even when the automatic stay protects you. To start the process, you must pay court filing fees, although these may be made in installments or even waived if you can demonstrate an inability to pay. The court will require a thorough listing of your assets and financial status to ensure you are not making a fraudulent filing. A Chapter 7 bankruptcy stays on your credit report for ten years. After discharge, you will be unable to file for Chapter 7 again for eight years.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is essentially a reorganization of your debts. You will submit a payment plan to the bankruptcy court’s trustee and your creditors. The court will set the length of the plan, either three or five years, to allow you to catch up on payments on houses, cars, or loans secured by collateral instead of liquidating those assets. Your creditors cannot pressure you to pay the full amount, and the plan also protects any co-signers you may have.
Under Chapter 13, however, your debts are not discharged automatically; you must follow the plan in order to earn a discharge. All your disposable income must go towards your payment plan. You will still have to make your payments for any domestic support obligations you have, including child support and alimony. A Chapter 13 filing will stay on your credit report for up to seven years.
Debt Negotiation: Advantages and Disadvantages
Debt negotiation and settlement are achieved through private negotiations between a representative—an attorney or a debt settlement company—and your creditors. It is not released as a public notice but is reflected on your credit report. The process usually takes two to four years to complete. Clients are placed on a budget, and regular deposits are put into an escrow account. Any accumulated monies are used to pay debts.
A debt settlement may be a good way for you to avoid bankruptcy if you have a representative who understands your situation and creditors who are willing to listen. Creditors do not want you to file bankruptcy—they want their debts paid, after all—and the plan can offer them certainty, as well as possibly saving you fees.
However, there is no guarantee that it will work; there isn’t a law that requires creditors to accept your offer. Creditors may decide to close your accounts entirely or even to sue you, if your debt is high enough. And the process can’t protect you from debt collection calls. There may be tax consequences for debt forgiveness, including amounts that would have to be paid by April 15th of the year following the settlement. You should also know that scams involving debt settlement are common. Debt settlement companies may charge heavily for their services, sometimes up to 25 percent of the original debt. If you don’t complete the program, you will be deeper in debt than when you started.
Which Choice Is Right For You?
It isn’t an easy decision, and you don’t have to make it alone. An experienced attorney can review your financial situation with you and help you decide how best to proceed. For help in Plymouth, Braintree, New Bedford, Taunton, or Hyannis, contact Benner Law at (774) 404-8321 and talk to a Massachusetts bankruptcy attorney today.