Home Money Education     
Interactive Tools Budgeting & Money Managing Credit Home Ownership Banking & Cash Identity Theft
Bankruptcy

Bankruptcy and managing debt

Deciding whether or not to declare bankruptcy is a difficult decision. As a general rule, bankruptcy should be a last resort.

Things to Consider Before Filing for Bankruptcy

Bankruptcy affects much more than your credit:

  • Businesses increasingly use credit reports when making employment decisions. A bankruptcy filing could determine whether or not you get the job you want.
  • Insurance rates may rise if you have declared bankruptcy.
  • If you decide to move in the next seven to ten years, you may find it difficult to rent an apartment or qualify for a home loan.
  • Bankruptcies stay on your credit report for 10 years. Remember that phone companies and other utilities and service providers may look at your credit history before deciding to grant you their service.

Things to Do Before Deciding to File for Bankruptcy

  • Reduce your spending. Consider a smaller home or less expensive vehicle. Slash your spending, and you may be surprised to find enough money left over to repay the debt you’ve accumulated.
  • Talk with your creditors. Despite what you may have heard, your creditors are often willing to work out a payment plan to help you pay off what you owe.
  • Talk with a nonprofit counseling agency. These agencies can help you create a plan that will handle all of your debts. See the Credit Counseling section for more information .
  • Talk to an attorney and understand the consequences of declaring bankruptcy.
  • Consider debt consolidation carefully. You may be able to borrow against a workplace retirement plan, stocks, or other securities you own, or the cash-value of a life insurance policy in order to pay off your debt. However, all of those options have serious implications. Make sure you analyze the potential risks and consequences thoroughly.

2005 Bankruptcy Legislation

In 2005 a change in U.S. bankruptcy legislation made it harder for people to discharge their debts through bankruptcy. Instead, people are pushed to repaying a portion of their debts. Under this new law, many debtors will have to establish up to five-year repayment plans.

Here are some of the major changes under this new law:

1. Income eligibility for filing for bankruptcy

If your income is above your state’s median income or if it is determined that you can afford to pay 25 percent of your unsecured debt:

  • You won't be allowed to file for what is known as Chapter 7 bankruptcy (the protection from creditors given to all consumers under the former bankruptcy law)
  • You will have to set up a five-year repayment plan for your debt.

2. Determining what you can afford to pay

In 2005 a change in U.S. bankruptcy legislation made it harder for people to discharge their debts through bankruptcy. Instead, people are pushed to repaying a portion of their debts. Under this new law, many debtors will have to establish up to five-year repayment plans.

3.Tougher homestead exemptions

The new law places stricter restrictions on the homestead exemption, an exemption that protects your home from creditors. If your home was acquired less than 40 months before filing for bankruptcy or if you have violated securities laws or been found guilty of a crime, you may only exempt up to $125,000

4. Lawyer liability

Lawyers may get fined if information about a client is found to be inaccurate. Therefore, it may be harder to find a bankruptcy attorney willing to file.

5. Credit counseling and money management

You now have to meet with a credit counselor in the six months before applying for bankruptcy. Before debts are discharged, you must attend and pay for money management classes. It is important to find well-respected agencies to work with. See the Credit Counseling section for more information.

6. New debt may not be discharged

Any credit card debt, cash advances, and other forms of consumer debt borrowed within 70 days of a bankruptcy filing may not be discharged under the new law.

7. Quicker collections process

The "automatic stay", which buys debtors time on the collections process, is less generous. You only have 60 days after the request is filed, or 30 days if the debtor filed another case in the past year.