If you are drowning in debt, you may feel like bankruptcy is your only way to keep your head above water. While Chapter 13 bankruptcy does help you get out of debt, it damages your credit score. Negotiating with credit card companies before filing bankruptcy is a wise move. If the creditor is willing to reach an affordable agreement, you can eliminate the need to file bankruptcy and save your credit.
Negotiating with Creditors
Even if you are leaning towards filing for bankruptcy protection, it doesn't hurt to at least attempt negotiating with your credit card company and other creditors. If you are still a customer and the credit card company has not charged-off the debt, stop using the card. Make any payment you can afford to show the creditor you are serious about paying the debt. Contact the creditor directly to discuss your options. The credit card company wants to keep you as a customer and may agree to reduce late fees and penalties to help get you back on track. If the account was sold to a collection agency, you will need to deal with the agency instead of the original creditor.
Consider credit counseling if you are unable to strike a deal with creditors. Counselors can help you create a budget and even negotiate with creditors on your behalf.
Other Options to Consider
Bankruptcy should be a last resort because it destroys your credit score. Chapter 13 bankruptcy remains on your credit report for seven years from the date you file. Explore other options to save your secured debt before considering bankruptcy. To save a home, you might want to try a forbearance, refinancing, loan modification, short sale or deed in lieu of foreclosure. If you aren't concerned about keeping your secured debt, try negotiating with all your creditors instead. Credit card companies are often willing to work with customers who want to settle debt. Just like Chapter 13 bankruptcy, negative account information remains on your credit report for seven years. With older credit card debt, waiting for it to fall off your credit report may be less damaging than filing bankruptcy and restarting the clock.
How Bankruptcy Works
Chapter 13 bankruptcy allows you to keep certain assets, including your home or vehicle, provided you are able to make the monthly payments. If you fell behind on your secured debt, it is important to continue making your regular payment to the creditor. Chapter 13 bankruptcy doesn't lower your existing payments, but it restructures past-due balances. You will need to pay both secured and unsecured debt, including credit cards.
Chapter 13 bankruptcy restructures debt over a period of three or five years. You are required to make monthly payments to the court appointed trustee. The amount of your payment is based on your debt and disposable income. Your disposable income is the money left over each month after your expenses. If you are unable to fulfill the terms of your repayment agreement, your debt isn't discharged. Your credit card company and other creditors can resume collection activity. Creditors can file a lawsuit against you to collect the money you owe. If you have a mortgage, the lender can begin the foreclosure process if you fail to make your regular payment or trustee payments. It is important to ensure you can afford all your current obligations in addition to repaying the debt. Take into consideration the risk of losing your job or unexpected financial emergencies. Since the repayment plan lasts for several years, you want to make sure you are comfortable with the payment.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.