Today there are two kinds of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is also known as total liquidation. It involves total liquidation of all debts and cancels all no-exempt debts. Chapter 13 bankruptcy is basically a court-mandated payment plan that sets up so called affordable monthly payments to all your creditors.
Filing Bankruptcy is a decision not to be taken lightly. Today it seems filing Bankruptcy is a new “fad”. Some attorneys TV ads seem to suggest that bankruptcy is the answer to all your financial problems. They are advising bankruptcy is a cure all to overcome even a small amount of debt. Consider very carefully the true consequences behind a bankruptcy filing. A bankruptcy will follow you around and is posted to your credit report for ten long years. Lenders today may not even consider offering credit to someone with a bankruptcy because the rules for credit are fast becoming just that rigid. Bankruptcy is a tool that should be used only after trying other alternatives.
Assess Your Entire Situation – Make sure your situation is beyond repair, have you tried negotiating with your creditors. An associate of mine came to me a few months ago telling me he was simply “overwhelmed“ with debt. The value of his own home was upside down and creditors were hounding him day and night. Threatening calls all hours of the day and he just could not take it anymore.
We sat down and assessed his finances and once he looked at everything on paper he had an entirely different view of his situation. After a simple 35 minute review he suddenly came to the realization that he could in fact possibly turn things around. All he had to do was get his creditors to accept a smaller payment temporarily and he could possibly get back on track. He did tell me he had tried in the past to negotiate with his creditors and had no luck at all. I told him start taking a proactive approach and to immediately begin a communication with them on a weekly basis.
Tell them “honestly” that based on your situation you are considering bankruptcy. This was not an idle threat because he had already consulted with two attorneys. Needless to say after hearing this he reported to me their attitude was very different and he was able to work with his creditors. The verdict is still out but he is doing everything in his power to get back on track. He was ready to throw in the towel for under $15,000 in debt. Yes a lot of money but is it really enough to destroy your credit history for ten years?
Increase your Income – “Duh! – No kidding! If I could do that there wouldn’t be a problem” What I’m talking about here is maybe a second job or a non – working spouse finding employment starting a business at home? Think of every possibility you may have to bring in cash. Look at everything. Can you sell assets? When you file BK more than likely you are going to have to sell them anyway, you may as well get started before the courts force you.
Remember some Debts will Never be Discharged – Recent Student Loans, Taxes, Child Support and alimony are a few. Also if for any reason you omit, forget on do not include the debt in your filing you will not be discharged from the debt. Many times for whatever reason people do not include all their debts and later find out even after their discharge they still owe the money, Ouch! There are other types of debt that may not be discharged. For example if the court determines fraud was involved or if any false statements were made when obtaining credit this could be construed as fraud. If you make a promise and intend to keep it and believe you will be able to keep it, which is not fraud.
Regardless of the late night info Guru’s who tout the fact that you can buy all the Real Estate you want with “Bad Credit or No Credit” It is getting tougher these days to participate in the real world of investing when your FICO score is less than stellar. If you value and protect your credit it will serve you well in building your Real Estate Empire.