Last year I published an article on Christians and Bankruptcy. This article shares details of my own personal bankruptcy and the impact that the process had on my life. I also explore the difficult moral issue this presents for Christians. Please accept as a premise for the following advice, that Christians should pay their debts if they have the ability to do so. We must accept the reality though, that there are cases where the amount of debt is beyond what a person may be able to repay over a reasonable period of time. In these cases, bankruptcy is a consideration.
1. Is Bankruptcy A Good Option For You?
Bankruptcy is very misunderstood, and as a result many people file that really should not. I have had hundreds of discussions with individuals that were going to pursue bankruptcy to resolve a debt of less than $10,000! There is no magic number that I can give you, but suffice it to say that the decision to embark upon bankruptcy should be reserved for the most dire of circumstances. Most people could earn $10,000 through a part time job in just a few months. Additionally, a $10,000 debt may be able to be settled for $3,000 to $5,000. I would never consider filing for bankruptcy over such a small amount of debt.
Another common belief is the idea that once you fall behind on your bills you should file for bankruptcy right away. If you are unable to pay your debt payments in full, one option is to simply pay what you can each month. If your creditors won’t stop calling, you can send a simple letter informing the creditor that you do not want them to contact you by phone and to do so only in writing. In this letter you can also make reference to the Fair Debt Collection Practices Act. This is all you need to do to stop your creditors from harassing you by phone. If you are currently in a situation where you can not pay your debts in full, you may be able to negotiate a lower rate and payment. Many times you can do this yourself by contacting the creditor directly.
If you feel uncomfortable negotiating with your creditors directly, I would recommend a non-profit service such as Consumer Credit Counseling Services. CCCS will assist you in creating a repayment plan that both you and your creditors can live with. Most people are surprised to learn that they may actually be viewed as if they are in bankruptcy (from a credit scoring perspective) after going on a plan through CCCS. A Chapter 13 (repayment plan) and a CCCS plan are very close cousins. One criticism I have of CCCS is that they don’t always make this clear. Another concern I have is that CCCS receives their compensation from creditors and this is somewhat of a conflict of interest. Notwithstanding these two issues, I think CCCS is an option for many people that can not bring themselves to negotiate with their creditors directly.
Most debt counselors consider a negotiated repayment plan viable if it can be completed within five years. If you are unable to repay your consumer debt within five years, even with a reduced interest rate, bankruptcy (Chapter 7 Discharge) should be seriously considered.
2. The Timing Of Your Bankruptcy
Almost as important as the decision to file for bankruptcy, is the timing of when you should file. A good attorney will view bankruptcy as a defensive legal maneuver. While there are some attorneys that run what I call bankruptcy mills, most bankruptcy attorneys are judicious about assisting people with this decision.
Consider this scenario: You have five credit cards, a total debt of $15,000, and you have fallen several months behind on your payments. Your accounts have been closed, you are now being contacted by the collection department, and your creditors will not negotiate with you. They are sending you harassing letters, calling you at home and at work. What if you simply sent a cease communication letter and did nothing more? The world would not end, and in about 24 months there is a very good chance that the credit card companies will write off the debt and take no legal action against you at all. Sometimes it pays to wait out situations like this to see whether or not you even need to file for bankruptcy at all.
There are other situations where waiting to file could be a disaster. If you are about to lose your home to foreclosure, have a vehicle repossessed, are being served a lawsuit, you need legal advice right away. Filing for bankruptcy will stall all legal and collection action for several weeks if not several months. After filing for bankruptcy, you become entitled to an automatic stay (a court imposed time out). Even the IRS must stop all collection action against you while your bankruptcy is pending.
The only way to get an accurate assessment of what to do is to get advice from an attorney. I recommend a service called Pre Paid Legal www.defendyourrights.us . For $26 per month you can gain unlimited access to attorneys for consultation. If you end up filing for bankruptcy, you can hire a bankruptcy attorney at a discount through Pre Paid Legal. I have used the service for eight years now and it has been a life saver for me.
3. Mortgages and Bankruptcy
If your primary financial problem is your mortgage, your best option may be to pursue a loan modification. Due to the current mortgage crisis, you will find the possibility of your lender agreeing to new loan terms very good. Rather than paying a mortgage modification firm $2,000 or more to help you, I would suggest that you join Pre Paid Legal and have an attorney assist you in pursuing a modification. Another great resource, we have available is Foreclosure Self Defense. This link will take you to more information on how to negotiate with your mortgage lender and information on obtaining a copy of this e Book.
Final Thoughts On Bankruptcy
I wish I could tell you that most bankruptcies are the result of sudden unexpected financial setbacks, but statistics really don’t support this. Most bankruptcies are the result of individuals spending more than they earn over a long period of time. Bankruptcy will provide you the chance to start over again, but you will likely end up in the exact same circumstances unless you change your financial habits. As many books as I have read and written on financial freedom, there is one undisputed common denominator. Learn to live on no more than 90% of your after tax income. Success is not just staying even, but building for the future. If you do not develop this discipline, you will not make any progress. I can assure you that there is no income that can not be outspent. Regardless of how much or little you earn, you must live on less than what you earn.
Bankruptcy is humiliating and traumatizing and something you won’t soon forget, so don’t embark upon it lightly. It is a way of escape from your financial troubles when there are no other emergency exits available. Bankruptcy will appear on your credit report for as long as ten years. You may also find that having a bankruptcy on your record may disqualify you from some employment opportunities, professional licenses, or even your ability to run for public office in the future. As bad as it seems, bankruptcy is not the end of the world. Most people can rebuild their credit in about two to three years.
I woke up one day about six years ago and was informed that my brother had embezzled 1.7 million dollars from my businesses. As much as I tried to find another way out, bankruptcy was my only option. As bad as bankruptcy was to go through, it was better than trying to manage a debt that was simply beyond my ability to pay.
Helping you make the most of God’s money!