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Should I Declare Bankruptcy?
by Gary Foreman
My husband and I got married quite young, made some unwise financial
decisions and ended up in debt (some credit card, some personal loans)
with a grand total of $24,000. My husband has worked very hard over the
years, sometimes 3 jobs at a time trying to make ends meet. We have gone
through credit counseling, and a consumer proposal. We are the parents
of 3 young children and have had to choose between paying our bills so
we wouldn't go bankrupt or buying groceries. After many years of trying
we feel that we have no other choice but to file for bankruptcy. We
honestly would like to do anything else but we feel that this is our
only alternative. ~ Exhausted in Sudbury
Exhausted is not alone. In 2004 there were about 1.6 million
bankruptcies in the U.S. and another 80,000 in Canada.
According to the U.S. Federal Reserve, the typical filer has about 1.5
times their annual salary in short-term, high interest debts (like
credit cards and personal loans). About 2/3 of those filing say that
they have lost a job and about 1/2 have faced a serious health problem.
Canadian and U.S. bankruptcy law are fairly similar. There's a national
law that authorizes bankruptcy and then state or provincial law
determines things like what property you can keep through a bankruptcy.
Basically, a bankruptcy discharges certain debts and says that the
creditor is no longer entitled to repayment. The purpose is to allow the
debtor to get a fresh start and creditors to get an equitable
distribution of any assets.
Just because debts are eliminated doesn't mean that the slate is wiped
completely clean. Debts discharged in bankruptcy will appear in your
credit history. In Canada they will remain for 6 years. In the U.S. the
bankruptcy will appear for 10 years.
There are also some debts that a bankruptcy won't eliminate. In both the
U.S. and Canada back taxes, alimony, child support, and student loans
are not discharged. Canadian student loans can be discharged 10 years
after graduation.
OK, now let's look at Exhausted's question. When is it time to throw in
the towel and file for bankruptcy?
Exhausted is correct. Bankruptcy should only be used when the other
alternatives have failed. When minimum monthly bills are more than the
family can pay, the first step is to contact the creditors and ask for a
payment plan. If that doesn't provide enough breathing room, it's time
to contact a qualified credit counseling agency. They can negotiate the
interest rates down.
Neither of those steps will reduce the amount owed. It will only cut
interest rates and create a more livable payment plan.
Sometimes, that's not enough. If a credit counselor can't work out a
plan to pay off your debts in less than five years, then it's time to
consider something more drastic.
In Canada a debtor can file a 'consumer proposal'. It brings in a
trustee and asks for a reduction of the amount owed and/or the interest
rates charged. The debtor makes payments per the plan. At the end of the
plan remaining debts are discharged. Creditors have the right to reject
the proposal.
In the U.S. a chapter 13 bankruptcy filing serves a similar function.
It's meant for people with a regular source of income and enables them
to keep some valuable property (such as a house) while putting together
a payment plan that usually runs 3 to 5 years. Payments must be
completed under the plan before the remaining debts are discharged.
If Exhausted's income is only enough to cover living expenses without
repaying debts, a bankruptcy filing in Canada or a chapter 7 bankruptcy
in the U.S could be appropriate. In either country, if there's income
available for debts, it's the court's responsibility to redirect the
debtor to a consumer proposal or chapter 13 filing.
In a Canadian bankruptcy or U.S. chapter 7 filing, the court appoints a
trustee. The trustee collects the debtor's assets, sells them and then
pays the money out to the creditors. Some items are exempted from the
sale. After the proceeds are distributed to creditors the remaining
debts are discharged.
There are other things to consider when deciding whether to file for
bankruptcy. Bankruptcies are public records. In the past you could be
pretty sure that no one would find out unless you told them. But, in
today's interconnected world that's not so sure.
It's also possible that the debtor has some asset that they could lose
during bankruptcy. For instance retirement accounts or valuable family
heirlooms could be liquidated.
In the states, there will be filing fees, typically about $200. Your
lawyer will get about $1,000 in fees, although you can keep that down by
having current statements on all your income and debts. Many will offer
one free consultation. Canadian fees are government regulated and
typically are paid out of the assets available to creditors.
Exhausted should also pay attention to proposed bankruptcy legislation
in both the U.S. and Canada that would make it harder to declare
bankruptcy.
Finally, there is one reason for Exhausted to smile despite the
challenge her family has faced. There was a time in old England where a
person unable to pay their debts could get the death penalty!
Fortunately that law doesn't apply today and no one is adding it to any
proposed legislation.
About the author
Gary Foreman edits
TheDollarStretcher.com website and newsletters. If you'd like more
time and money you'll find hundreds of articles to help you stretch your
dollar and your day. Visit today!
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