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Explore all options before declaring bankruptcy

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

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Question for the CreditCards.com expert

Dear Credit Guy,
I am over my head in credit card bills and also have a truck payment due every month. Is filing for bankruptcy a good solution? My monthly salary just doesn't cut it. Help me get out of this rut.  -- Riley

Answer for the CreditCards.com expert

Dear Riley,
The answer is simple, but may be more difficult to implement than you would like. The key to financial well being is to live within your means or in plain language, spend less than you earn. Credit cards make it too easy to supplement income for everything from emergency expenses such as medical bills or major car repairs to eating out and other entertainment expense. A better way to handle emergency expenditures is to save for them. Extras such as eating out and entertainment should only be spent if you have planned for them in your budget.

But, I can hear you saying, "I'm already in too deep, I can't spend less than I earn." Depending on your income level and the total amount of your debt, you just might be able to manage with a little help. Because I don't know all the particulars of your finances, I can't give you specific advice on how to move forward, but a qualified credit counseling expert can. I recommend you contact a nonprofit member agency at the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling and speak with a certified credit counselor.

After a thorough review of your finances, your counselor will let you know what options are available for you to meet your financial goal of getting out of debt. You may qualify for a debt management plan (DMP), which may lower ther monthly payment on your credit cards and give you enough breathing room to make other changes in your spending habits. It could be that you may not have enough income to qualify for a DMP, and your best option may be to explore bankruptcy.

The reason I suggest you start with a credit counselor is because pre-bankruptcy filing credit counseling is a mandatory requirement for filing bankruptcy per the 2005 bankruptcy reform law, the Bankruptcy Abuse Prevention and Consumer Protection Act. The fact is that all other options should be explored before seeking bankruptcy. So, if bankruptcy is something you need to explore, you will already have a relationship with a counselor to satisfy that requirement. You would then need to contact a bankruptcy attorney and explore your best options within the bankruptcy system. 

Some things to keep in mind about bankruptcy protection include:

  • Your income must be below the median income level for the same size family in your state to qualify for Chapter 7 bankruptcy, which would eliminate your credit card debt. If you don't qualify for Chapter 7, you would be filing a Chapter 13 where at least of portion of your debts would have to be repaid.
  • A bankruptcy will be reported on your credit report for 10 years in most cases. The weak job market and the fact that many employers check credit reports means if you needed to search for a job, you'd already have a strike against you.
  • In addition to job seeking, your insurance may increase, you may have a more difficult time renting a place to live and you will pay more for credit until the bankruptcy is no longer reported on your credit report.
  • One last thing to keep in mind is that a bankruptcy is a public record. That record is available for others to view if they do a public records search on you.

I mention the above negatives of bankruptcy just so you know what you're getting into should you need to file, not to discourage you if you believe it is the best option for you. Living with the stress of overwhelming debt is something no one should have to do and if bankruptcy is the best way for you to get out of debt, then you should file.

Take care of your credit!

See related: Credit checks for job applicants become more common, States weigh limits on credit checks for employment, A guide to navigating through bankruptcy, 5 post-bankruptcy myths

 

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: November 23, 2009



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