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Why Your Debt Relief Options Should Include Your Future Plans

Filing for bankruptcy won’t make you wealthy – it will simply end today’s bill problems.  If you fall back into a financial pit in the future, you’re going to have to deal with them.

That’s why many of my colleagues look first to Chapter 13 as a way to help their clients get out of debt.

For a long time I thought this was a bad idea because it was faster to simply file for Chapter 7 and wipe out debts rather than embark upon a payment plan that ran 3-5 years.  Over the years, however, I’ve come around to the other side of the argument.

Though it may look like Chapter 7 is a better option whenever it’s available, that’s not necessarily the case.

Take, for example, this email I received from someone who definitely needs some help:

I had a prior bankruptcy that ended in May 2011.I lost my job in July 2011 and was forced to buy a car for that job prior to being laid off. I am now behind on the payments and will be giving the car up; this will put me in default. I also have 4 judgments against me as well as other debts that arose after my bankruptcy.  This is to say nothing of a large student loan which is on deferment but will have to start being paid back.  My wife and I have a join mortgage, but that’s paid up to date.  Can I file for bankruptcy again?

Your Options For A Repeat Bankruptcy

If you file for Chapter 7 bankruptcy and wipe out your debts, you can’t file another Chapter 7 for a period of eight years.  That means a job loss, car repossession, foreclosure or medical bill that comes up after your bankruptcy is going to need to be dealt with a different way.

You can file a Chapter 13 bankruptcy at any time after a Chapter 7 discharge, but if it’s within 4 years of your Chapter 7 then you’ll need to propose a repayment of your entire debt.  If the Chapter 7 was filed more than 4 years ago, you may not need to pay 100% of the debt in a Chapter 13.

When You Can’t Make Chapter 13 Work

The inquiry above makes it clear that this person won’t be able to file for Chapter 13 unless his wife is employed and is able to contribute enough money to fund his repayment Plan.  That repayment plan is going to need to account for payment in full of all of his current debts because his prior bankruptcy was less than 4 years ago.

If his wife won’t fund his Plan, then he won’t be able to make a Chapter 13 work because he does not have any regular income.  Remember that one of the prerequisites of a Chapter 13 Plan is that you have regular income.

Think Outside The Bankruptcy Box

If you’ve got debts and can’t file for bankruptcy then you’ve got to look at other options.

For student loans, you may want to think about income-based repayment plans to get you through the rough patches (if you’ve got $0 income, your income-based repayment plan can be $0 per month).

If you’ve got judgments against you, there’s always the ability to negotiate small payments.  Depending on where you live and your financial situation, you may opt to ignore those judgments until you’ve got income or a bank account to protect.

Post-repossession deficiencies are, to a large extent, handled the same way as judgments.  You won’t know exactly how much you owe until the car’s sold at auction, so there may be some time until you need to worry about that as well.

Proper Bankruptcy Planning Avoid Problems Later

The bottom line is that you should be thinking about the future not only in terms of your post-bankruptcy credit score and ability to buy a home or car, but also how your bankruptcy filing may limit your choices later on.

Don’t make a decision until you carefully review your options – doing the wrong thing may cost you a great deal of headache (and money) in the long run.

By |July 24th, 2012|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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