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The answers to your Bankruptcy questions are found here. Browse around to find new tips and advice from our helpful list of FAQ's from people like yourself.
Q: Can filing bankruptcy stop my creditors from harassing me?
A: Yes. This is one of the major reasons many people decide to file. However, it is important to note that third-party bill collectors (i.e. anyone outside of the company you owe money to that is hired to collect the debt) must stop bothering you if you simply tell them, "I do not intend to pay this debt; please leave me alone." See information on the Fair Debt Collection Practices Act
Q: What alternatives are there to filing bankruptcy?
A: Although the new bankruptcy law makes filing bankruptcy more difficult and less attractive, luckily, there are more alternatives to bankruptcy today than ever before. The four methods explored here are negotiating with your creditors, using a bankruptcy attorney, debt settlement, and debt management.
One way of dealing with crippling debt is to simply ask your creditors what they can do for you. Can they lower or eliminate your interest rates? Forgive late-payment fees you may have already racked up? Put your debts into "forbearance" for a few months while you get yourself back on your feet? If you're asking yourself, "Why would my creditors agree to any of this?", the answer is because they know if you file bankruptcy, they will get little or nothing. Helping you avoid bankruptcy by coming to more favorable terms can be vastly preferable to many creditors than going through bankruptcy proceedings to recover what they're owed. You would be surprised how easy many creditors can be to work with.
A similar, but slightly different option is to use a bankruptcy attorney to help you settle one or more of your debts. Let's say you owe a company $10,000, and they're threatening to take you to court to recover it. You could hire an attorney to draft a letter stating that you are considering filing bankruptcy and asking if they would be willing to settle the debt for less than the full amount. Often, a company will agree to settle for 10-30% of what they're owed if they think you might declare bankruptcy otherwise.
More dramatic is the practice known as debtsettlement. Under a debt-settlement arrangement, you stop paying your bills, and instead, pay a debt-management company. They don't remit payment to your creditors (as under debt management/ credit counseling, discussed below), but instead, put your money in escrow. When you've achieved a certain balance or your creditors begin to turn up the heat, your debt-management company offers to settle the debt on your behalf, using the money you've saved up in escrow. This can damage your credit, but not as badly as bankruptcy.
A less aggressive alternative to bankruptcy is debt management, also commonly referred to as "credit counseling" (although, technically, debt management is just one aspect of credit counseling, which is a much broader term). Under this practice, your debt-management company (also sometimes known as a debt-consolidation company) works out deals with your creditors to lower interest or forgive fees, etc., and you pay the debt-management company, who then remits payments to your creditors. You can normally save significantly on interest charges by using a debt-management firm, but more importantly, you get the ease of making just one payment per month, instead of several. Although debt management can be temporarily harmful to your credit, it's much better in the long run then falling totally behind on your bills and having no other solution but bankruptcy.
Q: What is better for my credit, filing bankruptcy or enrolling in a debt-repayment plan?
A: Although enrolling in a debt-repayment plan can be temporarily harmful to your credit, virtually nothing you can do is as harmful to your credit score as declaring bankruptcy is. In fact, the only thing more damaging to your credit than filing bankruptcy is inaction -- ignoring mounting debts you'll never be able to repay and simply allowing interest to accrue. Bankruptcy should be the last resort only for people who literally have no possibility of ever paying off their debts, and for whom the options of debt management and debt settlement are simply not feasible.
Q: What steps do I need to take before I file for bankruptcy?
A: Under the new bankruptcy law, you must undergo credit counseling before filing for Chapter-7 or Chapter-13 bankruptcy. From there, you will be subject to your state's "means test" to determine if you are eligible for Chapter 7 (you must have income less than the state median). Then, before your bankruptcy becomes official, your creditors will have an opportunity to challenge your right to bankruptcy in court -- if you are anything less than 100% truthful, your bankruptcy motion may be denied.
These are the steps you need to take, legally, before you can file for bankruptcy. The steps you should take, in order to avoid making the wrong decision, are to consider every possible alternative to bankruptcy that there is. See more information about negotiating with your creditors, debt management, and debt settlement. Bankruptcy should always be the last option.
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