Coping with High Debtby James Gaius Ibe, Ph.D., CAE.
What are the consequences of failing to repay your debts? What should you do when you are faced with mounting debts and can’t pay your bills? Are there alternatives to bankruptcy? What are the different types of bankruptcies? When are they appropriate? The answers to these questions are pertinent to the agonies people go through when debts get out hand and frustration sets in. Before you despair get the facts.
The consequences of failing to pay your bills are severe in more one way: You could get a bad credit rating which limits your ability to borrow in the future. Further, subsequent borrowing when available would be in a sub-prime market with the attendant high interest rates. Additionally, your wages may be garnished. A court may order your employer to pay up to 10 % of your salary each pay period to those creditors who have obtained court judgments against you. In some cases, creditors may sell property you used as collateral to secure the loan. Note carefully that if you are sued and you lose the case, you may be required to pay the creditor’s legal cost as well, in addition to your own legal cost and amounts you owe. Finally, you may be forced into bankruptcy if you fail to come to reasonable and credible plan with your creditors to repay your debt.
What is Personal Bankruptcy?
Bankruptcy is the filing of a petition with the bankruptcy court to obtain protection from collection efforts of your creditors. It is normally triggered when an individual’s debts exceed current income and property. At the end of bankruptcy, some or all of the individual’s debts will be canceled. Bankruptcy involves a Federal court proceeding in which the individual’s obligations are balanced against his or her creditor's rights. The individual’s objective is to reduce or eliminate the debt completely ("wipe the slate clean"). The creditor's objective, on the other hand, is to collect as much of the debt as possible. The bankruptcy proceeding is the forum in which the debtor and the creditor resolve differences.
Are there alternatives to bankruptcy?
Congress has recently passed a bill that will make it a bit more difficult for some people to obtain bankruptcy. Though many people file bankruptcy to deal with their debts, just as many shy away from bankruptcy and consider other solutions to straightening out their debt problem for good reasons. Bankruptcy tends to severely damage your credit rating. It also may remain on your credit files for about seven years and in some cases longer. There are a number of different strategies for handling debt.
Restructuring Debt Without Bankruptcy:
If you can’t live within your means then contact your creditor(s), ask for their cooperation, and try to work out different payment arrangements or options. For example, if you are overwhelmed by credit card debt, get in touch with the creditors, explain the situation, and ask to temporarily reduce your minimum monthly payments, waive late charges, and extend the payment period – with smaller payments at "no" interest. A second recommendation is to turn to the Consumer Credit Counseling Service, a nationwide nonprofit organization that will work with you and your creditors to devise a more manageable repayment plan suited to your cash flows. A third might be to sell any of your assets that have a resale value and apply the proceeds to your debt. Any balance due can be negotiated with the creditor. Finally, another solution is to consolidate all outstanding debts into a single loan (often through credit card balance transfers and home equity loans). This approach relieves you of being saddled with debt from multiple creditors, since you will be making payments only to one lender.
What Are The Various Types of Bankruptcies?
Chapter 7 is the most severe, can be used by all individuals and businesses. All unsecured debts are terminated, and are paid if any money remains after secured creditors are paid and after various exemptions permitted by law are claimed by the debtor.
Chapter 13 is typically used by wage earners and small businesses; this delays and reduces amount of payments to creditors over a period of time; this is known as a Chapter 13 Plan, or an individual reorganization.
Chapter 11 is used by larger businesses, and resembles a Chapter 13, with many more requirements. If all you need, is a plan to pay off your debts, then a Chapter 13 or Chapter 11 is preferable, rather than a
Chapter 7, particularly if you intend to reestablish your credit worthiness.
ABOUT THE AUTHOR: Dr. James Gaius Ibe is the Principal-at Large of the Global Group, LLC-Political Economists and Marketing Management Consultants. He is also a senior Professor of Economics and Marketing at one of our local colleges.
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