Bankruptcy may be one of the first options you consider if you have no income, but there may be other options for debt relief. In fact, because you do not have any income, you may have choices that are not available to others, such as defaulting on the debt or loan forgiveness. If your lack of income is only temporary, you may also consider negotiating with your creditors or debt consolidation.
According Stephen Elias, Albin Renauer, Robin Leonard, authors of “How to File for Chapter 7 Bankruptcy,” rather than file for bankruptcy, you can stop paying creditors. If you do not have a job, the creditor may choose to write off the debt. Although it is possible that the creditor will sue you and obtain a court judgment, the creditor’s judgment is worthless until you have some means to pay it. Even if you are receiving disability, unemployment or welfare benefits, this is not subject to the judgment. You should consider this option carefully because it has long-term consequences, such as negative marks on your credit report. Also, the creditor can renew the judgment. Under no circumstances, however, can you be arrested for not paying the debt.
Some people have no income, but they do have some funds, such as money in a savings account, or perhaps they expect to get a job soon. If this is your situation, you can negotiate with creditors to work out a repayment plan. Many creditors offer long- and short-term plans that may last for as little as a year or as long as five years. The monthly payments are generally less than your current monthly plan. Most creditors have special departments assigned to handle repayment options. You can call the creditor and state that you would like a repayment plan.
If you have no income and it appears that you will not have any income for some time, a creditor may agree to forgive the debt. You will no longer have to repay the debt, but you might have to pay taxes on the amount that's been forgiven. When a creditor forgives more than $600, it must report the write-off to the IRS and you will be required to declare it as income and pay taxes. However, if you are considered insolvent -- that is, if you have more debt than assets -- you do not have to report the forgiven debt as income.
Most consumer debt has a higher interest rate than money borrowed from a home equity line of credit. Consolidating debt into an equity line may lower your overall debt payments since the interest rate is lower. Like a repayment plan, this is a feasible option if you expect to start a new job soon. One added benefit is that the interest paid on an equity line is tax-deductible. Keep in mind, however, that consolidating debt into an equity line may be a risk because the lender can foreclose on the property if you are unable to repay the debt.
- How to File for Chapter 7 Bankruptcy; Stephen Elias, Albin Renauer & Robin Leonard