USA Debt Solutions – Chapter 7 and Chapter 13 Bankruptcy

This is an explanation of the options available to filing bankruptcy in the United States and most definitely not a recommendation of any particular option on offer.Please don’t believe what may be said about bankruptcy or go along with any impression it is an easy fix to a debt problem, this impacts your life in a significant way therefore ensure you seek the best advice that is available to you.

You have to be absolutely certain that bankruptcy is the right solution for you where you know for certain there is no viable alternative, if you can’t agree with a plan with your creditors and therefore the last resort is bankruptcy.

There will be variations to bankruptcy law depending on which state you reside therefore the following will be a general overview and please remember bankruptcy is not the easy way out it’s portrayed to be just because a relative or neighbor for example filed chapter 13 doesn’t mean it’s right for you, get qualified professional advice ultimately you will want a good bankruptcy lawyer on your side.

The following Chapter 7 and chapter 13 bankruptcy sections are contained in the same post as to provide comparisons between the two within the same post.

Chapter 7 Bankruptcy

Also known as straight bankruptcy or liquidation bankruptcy this is more drastic than say Chapter 13 which will be covered below.

Chapter 7 Bankruptcy is for individuals and businesses who are not going to come up with a repayment plan to creditors. This is where assets are sold and used to make payment towards your debts. This could be the solution if you have little in the way of assets, there are exempt assets for which you will be able to retain such a s your clothing and vehicle if it is of low value.
If you are using a bankruptcy lawyer be sure they cover what assets you are allowed to retain and which you aren’t, this is of course dependent on whichever state you reside so make sure you have your state’s bankruptcy code covered.
It is difficult to advise if you will or will not lose your home as every bankruptcy case is different there are factors such as if you are behind payments with the mortgage then there is a danger this will be lost and if the court can resell it for a reasonable profit to pay your creditors you will have to walkthrough this with a qualified lawyer.

It’s certain you won’t be able to keep luxury cars, second cars, expensive art collections, second homes any spare cash in bank accounts and other investments.

Debts that are not discharged in chapter 7 bankruptcy are child support, student loans and money owed to the US Government and debts listed under any previous bankruptcy.

Since 2005 there has been a law for which anyone wishing to file bankruptcy has to meet a qualification criteria regarding income and expenditure – this was brought in to prevent abuse of the bankruptcy laws by which people may have the means to repay their debt but choose not to do so.

To go through with the Chapter 7 Bankruptcy process you will have to dig out all your accounts for the last year which will include tax returns, payslips, bills and mortgage details and go through these with a lawyer who will arrange your court dates and credit counselling which is required under the 2005 bankruptcy laws. After chapter 7 bankruptcy is filed your creditors cannot legally contact you again to chase for payments.

You cannot file for chapter 7 if you previously filed for chapter 7 bankruptcy and the process from filing to discharge is usually three to four months.
Remember a Chapter 7 bankruptcy will stay on your credit file for 10 years from the anniversary of the date the bankruptcy was filed.

Chapter 13 Bankruptcy

An alternative to Chapter 7 Bankruptcy where in return for liquidation of assets you get a clean start with Chapter 13 Bankruptcy you get to keep your assets such as your home but you enter a repayment plan for three to five years where the proceeds will be distributed amongst individual creditors.
Chapter 13 Bankruptcy is also known as restructuring bankruptcy and is available to individuals and small businesses.

Also called “The wage earner’s plan” where basically you are restructuring your finances to pay towards your debts in a 3 to 5 year plan with a lower monthly payment than your current debt obligations. Unlike chapter 7 bankruptcy you get to retain your home with Chapter 13 which is what you would naturally want to do especially if you have built up significant equity.

. You also have the legal protection that when you enter Chapter 13 bankruptcy which means individual creditors will be unable to contact you.

As with Chapter 7 bankruptcy Chapter 13 is filed at a court where a meeting with creditors will take place at a later date and the judge will decide if the plan is feasible, one criteria is you can prove that you can meet your repayments such as you can provide evidence of a regular income. You will also have undertaken credit coundelling prior to any court hearing as per the 2005 bankruptcy law.

To meet the criteria for Chapter 13 bankruptcy your secured debts must not exceed $1,010,650, and your unsecured debts cannot be more than $336,900.

Chapter 13 bankruptcy remains on the credit file for 7 years from the anniversary of filing.

For more information on bankruptcy in the US here is a section from the the US Courts website which goes into detail on the subject of bankruptcy:

http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics.aspx

ONCE AGAIN ONLY DECIDE ON THIS AFTER YOU HAVE RECEIVED QUALIFIED HELP & ADVICE AND IF YOU’RE ABSOLUTLEY SURE THERE IS NO VIABLE ALTERNATIVE.

My journey into debt….

The question “How can I get out of debt?” is one that will frequently enter your mind when you find your credit card & other unsecured debt balances piling up, there is nothing more you want than to be out of this situation but you end up deeper and deeper in as over time the interest compounds making the minimum monthly payment even more difficult to meet.

I for one know this situation too well for most if not all of the last decade and a bit this very question popped into my head along with experiencing escalated stress levels on a daily basis.

Read on to learn from my experiences of how I got into debt and how surprisingly easy it is to run up large credit card balances. Essential to getting out of debt is knowing how you got there to begin with and if people learn from this then I know I’ve done my job here :-

It started with being a university student in the late ‘90s studying for a IT degree, this was the boom industry back then offering high earnings which to an extent it can still do so today depending on your skill sets and experience.

As a student it’s a fact of life you are going to be living above your means and this so much more prevalent today then when I was at University as a mature student in the late ‘90s especially with the increases in tuition fees and I can imagine university education being even more expensive in the US.

My journey into debt started in the late ‘90s and from graduation in the early 2000s my debt levels increased instead of going down as stated above there was the living for today during the degree course even though I did have a job in the evenings which made my course even more challenging then it was.

In the last six months of my course I found myself behind with my final year dissertation which was required for the hons part of the BSc hons degree as a degree without honours was just not worth anything and would have rendered the previous three years studying a waste therefore I gave up my job and lived on what student loans I was entitled to and of course my good friends at the time the credit cards. I felt it didn’t matter as I would finish off my degree make sure of my dissertation for the BSc(hons) and get a job straight away after completing my course.

Roll onto July 2001 by this time there wasn’t as many jobs in the IT industry as there used to be which may have been attributed to the tech stock crash of March 2000 and I had to start getting used to experiencing more rejection than I ever faced in my entire life before when applying or jobs and I used to be miserable whenever a girl turned me down for a date. It seemed so easy applying for jobs online just emailing or uploading your CV/Resume to an employment agency or directly to a prospective employer, you know just a few clicks and you can send hundreds and thousands off a day but nothing much came back just the occasional interview here and there.

July 2001 started to roll into August then September and finally in October I managed to find a short term contract role at an ISP. It didn’t matter that my university degree barely touched on the networking genre as most of my courses at University where on applications development but I have finally got a job starting in the November I was happy and so I thought the good times were here.

Over the next couple of years I made the minimum payments each month on my credit cards but I didn’t add up all that I owed, I went out a lot as after all these studying and doing part time jobs I owed it to myself to have a good time. I was living in the same cheap rental place I was in when as a student, eventually my earnings will increase and was feeling optimistic that some speculative stock market investments would come to fruition.

I worked hard and played hard but come the end of 2003 I was evicted from my cheap place forcing me to look for more pricier accommodation and another bombshell was dropped when my job was no more. I moved into a new place and started a new job at beginning of 2004 but left after 3 weeks as it was horrible, while unemployed again I couldn’t claim benefits as I had left a job therefore was without income and had to resort to using credit cards to buy food, it was a depressing feeling that every time I left home I was digging myself even further into debt.

I found myself employment again in April 2004 on a month by month contract as any job in IT was better than none, it added to my experience and of course provided an income which was a great relief.

Soon after starting this role I encountered car trouble and my new workplace wasn’t reachable by public transport.

This was a new job I needed to turn up to receive pay and keep my position in this contract secure as not only did I need to earn but this role was giving me more valuable experience. The only option available was the expensive option of car rental which further added to my credit card balances, you guessed it the deposits plus the daily rental rate that added up plus there was the cost of the car repairs on top. Having been unemployed for a few months there was no alternative but to resort to the credit cards again.

I was working again, happy and treated myself to a trip to Spain in the Summer taking advantage of cheap flights. After I returned from this trip I felt that the accommodation I was in was squalid it was only something I took up after receiving a short eviction notice the year before therefore needed somewhere better and so I moved again.

The place I moved to was a 1 bedroom apartment through a letting agency who after I moved said that my month to month employment contract wasn’t sufficient for me to pay the rent on a monthly basis and would therefore only accept payment for rental terms in advance by credit card. With already escalating balances and having moved in I was trapped I had no choice but to significantly add to my escalating debt by now in the twenty thousands ( I dare not count it at this time) so I willingly paid. After all those years of shared accommodation I felt I owed it to myself to have my own place and I would somehow work something out.

By late 2004 and early 2005 things were getting desperate a great deal of my income each month was going onto the minimum repayment and I started looking at get rich schemes on the internet getting ripped off a few times making the situation worse. At a time of property market boom I started looking at how I could get invested despite my woeful finances to make money from the equity to pay off the long term debt and like an idiot I got the plastic out to pay for a weekend property investment seminar which didn’t teach much, OK I did learn a few things but I could have saved all the money on the seminar plus the travelling expenses each day and found out what they taught on the internet.

In 2005 I finally got full time work but my salary despite being at a level not to be sniffed at barely covered my living expenses and with all the card repayments meant that I was getting into the red further each month.

In 2006 thinking I was going to get left behind and never afford my own property I sought advice on how this could be done despite my terrible position I steeled myself to be laughed at but owning property which would appreciate in value over time would accumulate equity that I could use to pay off my debt.

Contrary to expectations I was accepted for a mortgage, a normal mortgage not a subprime one and moved into a bigger place that was now mine for not much more than what I was paying for the smaller rented apartment, the only trouble was between 2004 to 2006 my accommodation was paid for on credit card for which I made only the minimum repayment on some cards even I switched balances therefore satisfying the minimum repayment criteria but it doesn’t help the credit file.

Onto 2007 I started paying the mortgage and shortly afterwards I took a look at what I owed which was now around £45,000 and did what I should have done at least three years previously I decided to get help. In July 2007 I was accepted into an Involuntary Arrangement(IVA) where I was able to pay a monthly contribution with the interest frozen for a monthly amount which was half of my minimum credit card repayments totalled and to keep my property as opposed to bankruptcy which I would have lost. Since then I managed to keep up my repayments in addition to being able to maintain my mortgage payments it’s been tough but my situation was better than before and in just a few years time all being well I will have completed the arrangement and become debt free.

The only thing is my property now is in negative equity but this is not going to be forever either.With hindsight bankruptcy may have been a better option back in 2007 but like many people in the world I didn’t see the credit crunch coming.

Being in debt has had a negative impact on my self esteem making me feel so stupid to having got in this situation and I was particularly depressed about this between 2005 to 2007 but have since learnt that there are many more people throughout the world in the same kind of or even worse situations regarding their level of personal debt so never think you are alone in dealing with.

Even though I did experience my fair share of bad luck over the years that contributed to the situation I beat myself up for my apparent stupidity but there are smarter people in the world than myself that got themselves into the same kind of mess and worse.

Don’t spend tomorrow’s money today – Depending on where you live in the world $10,£10 or €10 for example may not sound much added to your credit card balance but if you fail to account for this and repeat this habit of putting these small amounts to your credit cards these will significantly add up and before you know it you’ve run up a few thousand $£ or € worth so please be careful on how you use your credit cards.

Therefore to answer the question ”How can I get out of debt?”

Unless you win the lottery or come up with some kind of brilliant business idea that sells something that everyone in the world will want turning you into an instant millionaire you’re going to need quality help and advice to get you to take action – DON’T bury your head in the sand like I did thinking that some miracle will show up to take care of it, it won’t!

You are going to have to face up to this problem which means accounting for what you owe and studying and reviewing the options that are available then deciding on what’s best for you. Being in debt is stressful but please don’t make any knee jerk emotionally based decision. I’ve made more than my fair share of those.

Seek out professional advice that is free and impartial which doesn’t pressure you into any specific plan.

Whatever you decide there is no easy way to get out of debt, you are going to have to cut down on expenses doing without them luxuries, have less of a social life, less to no eating out, drive around in cheap cars as I know too well it is painful but it can be done.

If you live in the US learn the differences between chapter 7 and chapter 13 and how they apply to situation. If you own property with equity that you don’t want to lose you would probably consider chapter 13 which allows you to keep your home. You may not wish to opt for bankruptcy and may prefer a Debt Management Plan(DMP), it may even be possible to take it on yourself to negotiate with your creditors individually and propose an overall plan for repayment. If you seek professional advice on this please make sure the individual/organization you seek this advice fro is free, impartial and they don’t pressure you into any particular solution.

In the UK there are the following options:

Involuntary Arrangements(IVA) – where you make a monthly payment each month for 5 to 6 years which is formulated by an insolvency practitioner depending what you can afford to pay according to income & expenditure. Ideal f you own property with equity and don’t want to lose your home.Not available in Scotland check out Trust Deeds.

It will remain on your credit file for 6 years from the commencing date of the arrangement.

Bankruptcy – If you have little to no assets such as home ownership and you will be

free to make a new start sooner but it will remain on your credit file for 6 years just like the IVA and you can’t act as a company director for the duration of the bankruptcy.

Other options in UK include Full and Final Settlement, Remortgage – using equity in your home to pay off your unsecured debt ie credit cards and loans, Debt Management Plans,Consolidation Loans but be careful and Trust Deeds if you live in Scotland

Starting points for advice on dealing with difficult to manage unsecured debt is The Citizens Advice Bureau which are commonplace in towns and cities in the UK and Consumer Credit Counselling Service cccs.co.uk

All solutions to tackle debt problems have their advantages and disadvantages and whatever option you choose there is no Easy Way Out – you’ve got to cut your cloth and start doing without most if not all the things you like to spend money on.

Wherever you live in the world if you seeking help in dealing with your debts and if anyone offers you a plan that’s too good to be true then it probably is don’t walk away RUN AND RUN FAST!

The above post is my personal story which is posted here as to serve as a lesson to others to avoid as much as possible getting into the same situation as I did.

I am not offering or recommending any kind of debt solution here, this you will have to seek from a qualified professional which has to be free and impartial and therefore do not be pressured into entering any financial arrangement.

Debt Management Plan

A Debt Management Plan(DMP) is a fixed monthly payment for which you make to your creditors on the basis of what you can afford to pay each month after essential expenses have been paid and this payment is distributed equally amongst all your creditors. This is arranged via an independent debt management company.
A DMP may be for you if you have at least £100 after paying essential household expenses and owe at least £5000 with two or more creditors and less than £15000, if you owe more than £15000 then the debt solutions will have to be an IVA or Bankruptcy.
The advantages of a DMP is that you make only one payment each month at a rate you can afford, interest and fees may be frozen and eventually you will become debt free.
The disadvantages are you will be repaying your debt in full, there will not be a write off of any balance and you could end up paying for 10 years or more. It’s almost not guaranteed the creditors will freeze the interest and you may still be chased for immediate repayment as this arrangement is informal which means there is no legal obligation for your creditors to accept this agreement.
You also have to be careful in choosing your DMP provider. You have to make sure your DMP provider is licensed by the office of Fair Trading, you have to know what up front fees you are paying, check to find out what happens if you miss a payment, how much you’ll be paying and for how long you will be paying for. Also watch out for the interest and charges as unlike IVA’s the is no guarantee creditors will freeze interest and other charges with a DMP.
You have to make sure this is the right option for you, as per every other debt solution that’s out there first get free advice from your local Citizen’s Advice Bureau, National Debtline or Consumer Credit Counselling. Also check out websites which are a good source of free advice such as piggybankrupt.co.uk
You can also search around for forums and learn from others experiences with DMPs where you gain insight into which providers are good and which are not. These forums are also likely to be visited and contributed to by professionals in the industry, this is definitely the case with IVAs.
Overall like other debt solutions you have to consider this option carefully, make sure you are getting the best advice for free and consider carefully to be sure it’s the right one for you before committing yourself to a DMP.

Full and Final Settlement

A Full and Final Settlement Offer is an offer of partial repayment to your creditors in the form of a one-off lump sum payment in return for the remaining balance of the total debt being written off.

Full and Final Settlement Offer is a suitable strategy to clear your debts if you have access to a lump sum of money. This could be from:

Equity in your property which could be released through remortgaging your property or profit from sale of a property or any other asset, an inheritance or a lottery win, redundancy
or in the form of third party assistance to pay off your debt from from friends or family.

It is worth considering a full and final offer if you have the funds in place to see if a partial a one off payment will remove your debts as the creditors may prefer to receive one full payment now as opposed to small payments over a longer period of time, the creditors will be able to avoid the legal fees associated with pursuing bankruptcy for which they won’t receive much in repayment anyway and avoids any unforeseen events in the future which would prevent any repayment of any debt. You will also paying off less than the balance of your actual debt.

You can use a full and final offer to pay off an IVA but the funds that will make up the offer will have to come from a third part source paying on your behalf such as a friend or family member which will conclude the IVA at a much lower cost but with a lottery win or an inheritance the whole balance of the total debt you entered the arrangement with will still have to paid for example you owe £50,000 but you win or inherit £10,000 the whole £10,000 will be handed over and you continue paying until the IVA as run it’s term or the whole balance is paid off whichever is sooner.

If successful you will not only be clear of the burden of the debt but your credit file should now be updated to reflect the debt have been satisfied which will significantly improve your credit rating as it shows you have successfully dealt with your debt.

What you have to carefully consider though before making a full and final offer is there is no guarantee of acceptance, if your creditors know you have a lump sum available they could demand full payment.

You will find full and final settlement letter templates via the search engine listings which you can submit to your creditors if you are dealing with your creditors yourself but if you are in an IVA this will have to speak to your IP who will put the proposal to your creditors on your behalf for which they arrange a meeting at a later date which the IP will attend to which the full and final settlement offer will be put to the vote and the final decision depends upon the majority vote.

Bankruptcy – UK Personal Bankruptcy

In the UK bankruptcy is more correctly termed personal bankruptcy. A creditor can make you bankrupt if you owe £750 or more to that creditor and you have not been able to agree how to repay the debt. You can also be made bankrupt if any other arrangement you have made to repay your creditors such as Debt Management Plan(DMP) or an IVA fails.

Bankruptcy could be the best option if you don’t run a company, if it doesn’t affect your employment which it would do if you work in the financial services industry, own any property or have much in terms of assets. Regarding your employment have a read through your employment contract carefully to make sure bankruptcy doesn’t lead to you losing your job and you may wish to discuss this with Human Resources at work.

You have to present income and expenditure statement like an IVA. You can no longer own an expensive car, to retain car ownership at all you have to justify it’s usage if there is no public transport option to your workplace.

For the term of the bankruptcy you can’t act as a company director and is on your credit file for 6 years.

The advantages of bankruptcy is that everything you owe is written off and you have a clean slate in a shorter time than if you opted for an IVA.

However, like other debt solutions this is no easy fix and bankruptcy is often a last resort decision which has to be carefully thought through beforehand and you have to be without doubt this is the best option before you begin the bankruptcy process.
In other words you have to be sure you are aware of the consequences of bankruptcy such as the difficulty in obtaining bank accounts there are only a few accounts on the markets for bankrupts and these have restrictions associated with them.
Also obtaining a mortgage post bankruptcy is difficult as a general rule of thumb bankrupts are treated like lepers in the mortgage market and if you can somehow obtain a mortgage this will be the most expensive product there is.

Whilst you are bankrupt any assets that you have might be used to pay off your debts. After a period of time all of your outstanding debts are written off and you can make a fresh start.

A good website for advice on bankruptcy in the UK is piggybankrupt.co.uk the site owner has been through bankruptcy and came out the other side and since has made it his purpose to help others with advice on bankruptcy as from his experience there was no-one with the specialist knowledge to advise him when he went through it in 2006 following a failed business venture that left him with over £400,000 of business debt. I can very well identify with him as like myself went through university believing plenty of money will be made afterwards.

Also don’t rule out the usual help and advice resources such as your local Citizen’s Advice Centre.

IVA – Individual Voluntary Arrangement

If you have more than two creditors and debts of more than £15,000 you may wish to consider an Individual Voluntary Arrangement or which is better known as an IVA. This is a suitable alternative to bankruptcy which allows you to keep your home which you would otherwise lose.

What is an IVA? – An IVA is a contractual agreement with creditors via an Insolvency Practitioner(IP) where you make a monthly payment based on income & expenditure with a minimum usually £250 per month for a usual term of 5 years in some cases it could be 6 years..

The advantages of an IVA over bankruptcy is you keep your home, interest and charges are frozen for the duration of the IVA, the arrangement writes off a significant amount of the total debt which can be something like 75% and you are making a smaller monthly payment than you would be otherwise.

Now the disadvantages are this is not the easy get out of jail card it’s been presented to be as you have to conform to the confines of the arrangement or else it fails. For the term of the IVA your income and expenditure are taking into account where the maximum amount for the benefit of creditors whilst at the same time you are allowed to keep enough of your earnings to live reasonably but it doesn’t give you any scope to save money therefore during the term of an IVA don’t expect at anytime to accumulate much in the way of savings you may be able to scrape together a couple of hundred pound as contingency for things like car repairs but don’t expect to be taking much in the way of exotic holidays or any holidays for that matter. You can also forget about owning and driving expensive cars, you have to prove the need to own a car and it has to be of low resale value.
.
Disadvantages are you are not allowed to have any amount of money over £500, if you receive what is termed as a windfall which can be a prize draw or lottery win or inheritance and if this is £500 or more this has to be paid into your IVA. Failure to declare this could result in failure of your IVA.
Each year this arrangement is subject for review where your IP requires to report to creditors the client is conforming to the rules of the IVA, this requires the sending in to your IP the last 12 months payslips and a P60.

Any pay rises you receive 50% would be required to be paid into your IVA and some IVA clauses will require you to remortgage in the last 12 months of your IVA term to pay equity into the IVA if the equity in your home is more than £5000.

An IVA also remains on your credit file for 6 years following the start date of the arrangement just like bankruptcy.

Please consider this option very carefully taking into account the advantages and disadvantages presented above and always seek advice from a quality professional but make sure it’s free and impartial.
To learn more about IVA’s there are dedicated forums online which are posted in by IVA clients and Professional experts alike, here you can read the advice from the experts who make it their purpose in life to help those with debt problems and learn from the experiences of others with their debt problems it’s inspiring to read about those who had serious problems with debt and have come through the other side having turned their lives around completely.

Chapter 7 Bankruptcy

Chapter 13 Bankruptcy

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