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Former Olympic Rower Turned to Minimalism to Pay Down $82,000 in Debt
This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.You are drowning in credit card debt. Bill collectors are harassing you day and night. You just can't take it any more.
Should you consider filing for bankruptcy and starting fresh with a clean slate?
This is the issue confronting many Americans. According to the Consumer Federation of America, the size of the problem is staggering. There are over one billion cards in circulation. Most people pay only a portion of their credit card debt monthly, leaving an average balance of more than $10,000.
However, filing for bankruptcy is no panacea.
The new bankruptcy law that was passed into law in April 2005 makes it more difficult for consumers to discharge credit card debt. The new law requires debtors to pass a "means test" in order to qualify for discharge of debt or for payment of their obligations from existing assets. If a debtor does not pass the means test, they may still be permitted to file for bankruptcy, but they will be required to pay some portion of their obligations over a three-to-five year period.
The new law also requires mandatory credit counseling and budget analysis and attendance at a financial management course.
Under some circumstances, your home may not be exempt from creditors, even if your state provides for a homestead exemption.
Even if you qualify under the new bankruptcy law, it still may not be in your best interest to file.
The costs of bankruptcy can be significant. These include attorney's fees, fees for mandatory credit counseling, filing fees imposed by the Court, and other administrative fees and expenses depending upon the nature of your proceeding.
While bankruptcy will not destroy your credit, it will be far more difficult for you to get loans for big ticket purchases like a home or a car. The fact that you filed for bankruptcy will stay on your credit report for ten years.
You should consider bankruptcy as a last resort. Look at your other options, including negotiating with creditors and borrowing money from other sources. These alternatives may be preferable to turning your financial life over to the Court system and hoping that the result satisfies your goals.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).
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Reader Comments (Page 2 of 2)
9-07-2008 @ 11:05PM
Carlos Soto said...
Bankruptcy is not the end.....see creditafterbankruptcy.org. Read all about Stephen Snyder....the truth on Ch. 7 or 11 or 13...I filed 1 year ago and my scores off a 7 were in the high 4's....I am now, a year later in the mid to high 6's. I purchased a 2006 car with zero money down with a single digit interest rate, received 2 unsecured credit cards and have LEGALLY removed my 7 and old repo and my CURRENT 7 filing OFF all 3 reporting agencies. There is a system that WORKS. This guy knows nothing of this! Sure, you need to be responsible but that is a given. don't believe the hype, in this case the CRAP!!
9-09-2008 @ 10:10PM
sandra said...
i cant get an apt. because of bad credit, and i am homeless and living in horrible motels where i over pay. i am trying new things everyday to get out of this horrible situation.i need credit cards to live. and they all have been cancelled. so now it's even worse. the illegals btw get everything for free. our country was sold down the river to backward countries that are now getting rich off of poor americans. the banks are very very corrupt too now. so one has to come up with creative ideas to get out of their quigmire. the rich don't get it. some of them are dumb. if you have a good family and lots of money you are very lucky. if you don't, you have to use creativity and other ideas to make it. i just hate the ppl that love illegals and say americans won't take low jobs. not too long ago americans did all those jobs you idiots,and traitors. the worst thing is so. ca. the nastied place in the world and the most expensive and unamerican