Bankruptcy Not the Best Solution

HE-723, Revised Jan 1998. Fred E. Waddell, Extension Family Resource Management Specialist, Associate Professor, Family And Child Development, Auburn University

What Is Bankruptcy?

Personal bankruptcy, Chapter 7, is a court administered process which gets rid of some of your debts. The court gives creditors a prorated amount, depending upon what you owe and own.

Certain items are exempt, and the court allows you to keep them. In Alabama, for example, the bankruptcy court cannot seize and sell:

• Homestead exemption--up to $5,000 for a single person and $10,000 for a husband and wife.
• Personal property--up to $3,000 for a single person and $6,000 for a husband and wife. Personal property includes personal belongings, clothing, books, tools of your trade, and cars used for work.
• Most retirement accounts.
• Future earnings.

Other property is not exempt. The court can seize cars not used for work, furs, jewelry, art works, and items already paid for. The court then sells this property and pays your creditors a percentage of what you owe.

What Debts Are Not Wiped Out?

After bankruptcy, you still owe:

• Federal, state, and local taxes.
• Child support and alimony.
• Fines such as traffic tickets.
• Loans that you still owe for cars, appliances, and furniture.
• Government backed student loans for college.
• Debts resulting from lawsuits for intentional injury to persons or property.
• Money you owe for illegal debts such as bounced checks.
• Debts of $500 or more for luxury goods that you incur within 40 days of filing.
• Open-ended credit of more than $1,000 that you obtain within 20 days of the petition.
• Debts resulting from fraud or misrepresentation such as false information on a credit application.
• Legal fees and related costs. These fees can run as much as $1,000. You must pay these fees up front and in cash.

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What Are The Long-Term Consequences Of Bankruptcy?

Bankruptcy often causes lingering feelings of guilt and failure even years afterwards. Some bankrupt individuals even reaffirm and repay debts that have already been discharged. Bankruptcy can affect you for a long time:

• Bankruptcy will remain on your credit file and harm your credit for 10 years.
• Some bankruptcy information can be given out for the rest of your life if you apply for:
  • a job that pays more than $20,000 or requires a security clearance or bonding.
  • life insurance with a face value of more than $50,000.
  • a mortgage or other loan for more than $50,000.

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What Can You Do To Protect Yourself?

If you have nothing to lose, you probably do not need bankruptcy protection. You won't need to file since your creditors will not be able to recoup losses regardless of what they do. However, if you want to protect yourself from having to file, try some of the following to pay off your debts:

• Until you pay off your debts, cut up and return all of your credit cards. Or freeze your credit cards in an ice cube tray in your freezer. Promise yourself to leave them there until you are debt free.
• Increase the number of your withholding exemptions if you have been getting tax refunds (See your employer's payroll office).
• Use any cash value of your life insurance to pay toward your debts. Convert your cash value insurance to term insurance.
• Stop duplicate medical insurance coverage if both you and your spouse work and now cover each other in your policies.
• Shop for lower cost auto insurance, or get it from the same company as your homeowners' insurance.
• Sell personal items such as boats, cycles, guns, or other hobby or recreational equipment.
• Involve every household member in a "treasure hunt" of unused items. Sell these through the classified ads or in a garage sale.
• Find a temporary second job.
• Turn a personal hobby into an income-producing hobby.
• Use extra money from sales or second jobs to pay off your debt right away. Don't spend this money on other things!
• Speak to the credit managers of the places where you have payment problems. Explain why you cannot make your scheduled payments right now, and ask for a reduced payment for a while. Get a clear agreement on any reduced amount you will pay each month and exactly when it will be due. Faithfully keep this new agreement.
• Ask credit managers to report your new, smaller payments to the credit bureau as "on time." Otherwise the credit bureau may record these payments as delinquent because you are paying less than in your original credit agreement.
• Try to solve auto loan problems with your creditor as soon as you realize you can't meet your payments. Creditors can repossess your car any time you are in default on your payments. They do not have to let you know in advance. If creditors repossess your car, you may have to pay the entire balance on the loan as well as towing and storage costs to get it back. You may want to sell your car and pay off your debt. By selling your car, you can avoid the costs of repossession and a negative entry on your credit report.
• Contact the financial institution holding your mortgage, and tell them of your situation. Make arrangements to pay just the interest on your mortgage until you have caught up on your debts.

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Where Can You Get Help?

Four out of five people who go bankrupt are in financial trouble again in just 5 years. With some counseling, many people will be able to pay off their debts. You can get help.

• Contact a Consumer Credit Counseling Service (CCCS) located in the following metropolitan areas:
  • Birmingham 205-251-1572
  • Huntsville 256-533-1904
  • Mobile 334-602-0011
  • Montgomery 800-662-6119
  • Satellite offices are located in:
  • Dothan 800-662-6119
  • Tuscaloosa 800-662-6119
  • Opelika 800-757-2227
• Financial counseling is also available for military servicemen and women on these Alabama installations:
  • Ft. McClellan (Calhoun County) 256-848-5643
  • Ft. Rucker (Houston County) 334-255-3643/3815