5 tips for those considering bankruptcy
Filing is a huge step, so be prepared
Consumers and small business owners facing mounting debt may think filing for bankruptcy is their only option. Bankruptcy experts and consumer credit counselors recommend fgetting advice long before filing and thinking ahead to the challenges of being a bankrupt consumer.
"First, explore opportunities to resolve problems outside of bankruptcy," says John Rao, a bankruptcy attorney with the National Consumer Law Center, a Boston-based consumer advocacy group. "Bankruptcy isn't for everyone; it's not going to help everyone."
Who bankruptcy is for
The American Bankruptcy Institute suggests bankruptcy may be an option for people who:
- Have had their wages garnished or bank accounts frozen after judgments.
- Have most of their debts in unsecured loans, such as credit card bills or medical or doctor's bills.
- Have debt collection agencies calling at home or work (See: Tips for dealing with debt collection).
- Have lawsuits filed against them.
5 bankruptcy tips
1. Assess your finances. Know what your expenses, income and total debts are. Look at what caused the financial problem and how it can be avoided in the future.
2. Pull your free credit report. Go to www.annualcreditreport.com to get an accurate list of all creditors you owe. Some people make the mistake of thinking that because debt collectors have stopped contacting them about a debt that it is no longer on their record or that if a bank has charged off the debt it is no longer valid. Wrong. If you don't include all creditors on bankruptcy filings you run the risk of going through the entire process and still owing thousands in debt.
3. Inform all debt collectors and creditors. Bankruptcy law requires that all debt collection calls, letters and efforts to reach debtors cease once a bankruptcy petition is successfully filed in court.
"If a consumer is filing for bankruptcy, they should immediately tell the collector, provide the name of the attorney handling the case, and let them know, 'Here's the district that I'm filing in,'" says Valerie Hayes, vice president of legal, compliance and governmental affairs for ACA International, a debt collection industry trade group.
4. Get that credit counseling certificate sooner rather than later. One of the pre-filing requirements involves obtaining a certificate of successful completion of credit counseling with a government-certified counseling agency. The counseling can take place up to six months prior to filing. If time is of the essence in filing for bankruptcy protection and you have not completed the counseling sessions, this can cause delays and problems. Don't wait until the last minute.
Credit counselors recommend going into counseling to discuss budgeting and financial planning options before debts grow too large.
"There are several things that may help them avoid bankruptcy if possible," says Stephanie Osterland, a credit counselor at Michigan-based GreenPath Inc. Getting a second job to help pay off debt, selling assets or downsizing to a smaller vehicle may be options for some. "Sometimes it's working with the mortgage company and doing some kind of loan modification to get a lower payment."
5. Get an attorney. The bankruptcy laws have become so complex that experts say consumers should not attempt to file by themselves. "It's a very risky process to try to do on your own," says University of Illinois law professor Bob Lawless. "Consult an attorney."
He suggests consumers ask bankruptcy attorneys "a lot of questions about whether bankruptcy is the right alternative for you. You want an attorney that's there to solve your problems and sees bankruptcy as one of the alternatives. If the recommendation is still to file for bankruptcy, ask what the benefits are and the costs."
Rao, from the consumer law center, says timing may be important for some filers.
"If the reasons why they're filing is they have thousands of dollars of health bills because they don't have adequate health insurance, hold off," says Rao, who is also a member of the board of the National Association of Consumer Bankruptcy Attorneys.
He says people who file for bankruptcy and are hit with additional medical bills afterward can't file for bankruptcy again for another eight years. Those new debts are not protected in the original bankruptcy filing. "It makes sense to file for bankruptcy when you're on your way back up -- when you're not incurring as much debt and when the causes of your financial problems have been taken care of."
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