Debts can accumulate quickly, especially in the face of unplanned events such as a serious illness, the loss of a job or permanent disability. Bankruptcy is one option when you find yourself deep in debt, but because of the damage it can do to your financial well-being and credit rating, you should consider it a last resort. There are other options, including long-term repayment plans.
Chapter 7 bankruptcy discharges your debts, but you could lose assets like your home or car to pay off the secured debt on those properties. Alternately, you can file a Chapter 13 and have the court set up a plan for partial repayment of creditors over three to five years while retaining your property. Although bankruptcy clears away certain debts such as credit card balances, certain other debts, such as tax liabilities, student loans and back child support, cannot, under most circumstances, be discharged. In addition, a bankruptcy is reported to credit bureaus and remains on a credit report for ten years, hindering your ability to get any type of loan even if the loan is secured by property.
Long-Term Repayment Plan
To avoid having to file a claim in bankruptcy court or see their loan asset eliminated, creditors may agree to a long-term repayment plan. This would set up a fixed period of minimal monthly installments that the debtor would make in good faith until the debt is repaid. If the debt is secured by property, the creditor still has a claim on that property if the long-term repayment plan fails. While the creditor still has the option to report balances and late payments to the credit reporting agencies, a long-term repayment plan allows the debtor to avoid the more serious damage a bankruptcy would do to his credit rating.
There are debt management programs available that can help you draw up budgets and negotiate long-term repayments -- or reduced monthly payments -- with creditors. This is a preferable option to bankruptcy, as you avoid the negative impact of a bankruptcy filing on your credit score. However, debt management and credit counseling services can come with their own fees, charges and risks. Before you sign any agreement for such services, consult with someone you trust who has some professional financial knowledge, such as an accountant, banker or attorney and give yourself time to read and understand the agreement.
Debtors would do well to avoid bankruptcy court with a long-term repayment plan, if the plan is feasible. However, if it is unlikely the repayment plan will work, either because of the size of the debt or any permanent limitation on income, it would be best to turn to the bankruptcy courts as the solution. In these cases, long-term repayment plans are a waste of time and effort for both the creditor and the debtor.