If you are struggling to pay your monthly credit cards bills, you may be wondering if bankruptcy is an option for you. Bankruptcy provides a path to a fresh start, financially, but not everyone qualifies.
How to qualify for bankruptcy?
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy filing, the consumer’s assets are liquidated to pay their debts. Any remaining debts are forgiven. In a Chapter 13 bankruptcy, the consumer is deemed to have sufficient income to repay at least a portion of their debts and does so over a number of years.
Bankruptcy Means Test
In order to qualify for a Chapter 7 bankruptcy, you must pass a bankruptcy means test. First, determine your current monthly income by adding your gross income from the past six months and dividing by six. For example, if your gross income was $4000 per month from January to April, but you were laid off and had no income in May and June, you would add calculate your current monthly income as follows:
$4000 + $4000 + $4000 + $4000 + $0 + $0 = $16,000
Next, divide by the 6 months.
$16,000 ÷ 6 = $2666
After you’ve determined your current monthly income, check to see if it is above or below the median monthly income for your state. If it is below, you qualify for Chapter 7 bankruptcy and do not need to do any further calculations.
If Your Income Exceeds the State’s Median Income
If your income is above your state’s median monthly income, the next part of the means test involves deducting reasonable and allowable expenses from your income (expenses like food, housing and transportation). If it is determined, after making these deductions, that you have reasonable income remaining to make your debt payments, you will not qualify for a Chapter 7 bankruptcy. In this case, you can pursue a Chapter 13 bankruptcy, keep your assets, and work to paying off a portion of your debts, as determined by the bankruptcy court.
In 2013, about 1 million Americans filed for bankruptcy protection. Chapter 7 bankruptcies accounted for about 70% of these filings, with Chapter 13 accounting for the other 30%.
Alternatives to Bankruptcy
If your income is too high for a Chapter 7 bankruptcy, you may be wondering what other options are available to you besides a Chapter 13 filing.
A debt management program administered by a nonprofit credit counseling company can offer many of the same benefits of a Chapter 13 bankruptcy, including lower monthly payments, the end of collection calls, interest rate reductions and the ability to pay debts off over 3-5 years. A debt management program does not affect your credit score in the same way that a bankruptcy does.
To see if you qualify for a debt management program, you can either speak to a Certified Credit Counselor via telephone or use InCharge’s online counseling tool.
Debts Discharged in Bankruptcy
The bankruptcy code allows you to discharge the following kinds of debt: credit card, auto loan, mortgage, medical debt, utility bills, and personal loans.
Debts Not Discharged in Bankruptcy
The following debts are generally not dischargeable through bankruptcy: tax debt, alimony, child support, and student loans. Debts resulting from luxury item purchases and cash advances immediately prior to your filing can be challenged by your creditors and possibly excluded from discharge. If you are struggling with IRS debt, it is possible to work out a payment plan through a Chapter 13 bankruptcy.
How Long Will a Bankruptcy be on My Credit Report?
According to national credit reporting bureau Experian, a Chapter 7 bankruptcy will remain on your credit report for ten years. A Chapter 13 bankruptcy will remain on your credit report for seven years.
Should You File for Bankruptcy?
If you’re unsure whether you should file for bankruptcy, consider dedicating 20-30 minutes to a free, no-obligation credit counseling session. You’ll be provided with an unbiased recommendation based on your income and debts. If your recommended solution is bankruptcy, we can provide you with a bankruptcy attorney in your area with whom you can schedule an appointment.
- Pardons debts, or reduces debts for individuals in severe financial distress due to circumstances such as illness or loss of a job.
- Can temporarily prohibit creditors from seeking foreclosure of a home or repossession of a car.
- Can temporarily prevent wage garnishment, debt collectors’ harassment, and disconnection of utilities.
- Puts a blemish on an individual’s credit record for 10 years, causing difficulty in obtaining cars, homes, and loans.
- Is a notice of public record that may be seen by potential employers, insurance companies, banks, and other lenders.
- Bankruptcy can be seen as a social stigma that can cause feelings of guilt and embarrassment.
- You may not qualify for loans for several years, especially mortgage or home equity loans. If you are able to get a loan, you will not qualify for the lowest interest rates.
Bankruptcy Judge Warns Young People Of Debt’s Dangers
I think it’s safe to say most people would prefer to never have to see a bankruptcy attorney or judge.
However, there is a group of bankruptcy professionals that you should rejoice in having your high school and college students see if they ever have the chance. They are volunteers for a relatively new outreach program called CARE (Credit Abuse Resistance Education). CARE was founded two years ago by John C. Ninfo II, chief judge of the U.S. Bankruptcy Court for the Western District of New York.
Ninfo’s idea is to send bankruptcy professionals – judges, attorneys and trustees (the folks that handle the administration of bankruptcy cases) – into high schools and colleges all over the country to share their personal experiences dealing with people who have filed for bankruptcy protection.
What a brilliant idea. Who better to counsel young people about the perils of overspending than the professionals who have to deal with the aftermath? In the case of Ninfo, he literally has a front-row seat to the devastation that credit card debt can wreak on families.
“I sat day after day in my courtroom and watched people come in with one, two and three times their annual income in credit card debt,” the judge said in an interview. “We in the bankruptcy community are in the trenches and can tell (these students) first hand about the reality of it all.”
And the reality is that an unbelievable number of young people are finding themselves in deep debt before they hit their mid-30s.
One research group calls this group “Generation Broke.”
The fact is America’s population of young adults aged 18-34 are slipping into a downward debt spiral, according to Demos, a non-partisan, non-profit New York-based research organization.
Young Americans Are Broke
Demos recently released a report called “Generation Broke: The Growth of Debt Among Young Americans.” Here’s what the organization found among young adults aged 25 to 34 after analyzing the Federal Reserve’s Survey of Consumer Finances and dozens of other sources:
- The average credit card debt increased 55 percent between 1992 and 2001 to $4,088.
- Credit card debt among the youngest adults (aged 18-24) skyrocketed 104 percent during this same period to $2,985.
- Seventy-one percent of young credit cardholders revolve their balances every month, compared to 55 percent of all cardholders.
- The average young-adult household spends almost one quarter of every dollar earned on debt payments.
And the most troubling finding: Americans aged 25-34 have the second highest rate of bankruptcy (just after those aged 35 to 44), indicating that Gen-Xers were more likely to file for bankruptcy than were young baby boomers at the same age.
“Young adults starting off in the red will find that it impacts their financial security for years to come,” said Tamara Draut, director of the Economic Opportunity Program at Demos and lead author of the report.
Ninfo believes bankruptcy professionals are uniquely positioned to educate young people about the causes and consequences of credit card debt.
The judge wanted to specifically target high-school and college students to catch them before they make the same mistakes of the bankrupt individuals he sees in his courtroom. It was after seeing so many bankruptcy filings that listed amazing amounts of credit card debt that Ninfo said he began to question the debtors who came before him. What he found was troubling.
“There is no question that we see a lot of people who have had to file for bankruptcy because of some traditional catastrophic life event – a job loss, divorce or a serious medical problem that was not fully funded by health insurance. But today, we are also seeing many people come though the courts who by their own admission are credit abusers,” Ninfo said.
“They had no catastrophic event. They got caught up in our competitive consumptive society and overspent and abused far too easy to obtain consumer credit.”
In addition to real-life stories, Ninfo said CARE volunteers discuss budgeting, and lecture the students about the addictiveness of overspending and living beyond ones means.
Since it began in 2002, the Care Program has reached more than 10,000 students in Rochester, N.Y., and Ninfo is working hard to expand the program nationwide. He wants a CARE program in every bankruptcy district in the country. Currently parts of the program have been started in almost 30 cities, including Anchorage, Atlanta, Baltimore, Boston, Chicago, Cleveland, Dallas, Detroit, Houston, Kansas City (Missouri), Lexington and Miami.
Look, if you are responsible for the education of high-school or college students and you care about the way credit debt and consumerism could affect their financial future, contact CARE. Visit the organization’s website at http://care4yourfuture.org/. I particularly love the “Credit Card Chronicles” written by two young people who have just started college. They periodically post reports and tips on handling money and credit card offers.
CARE is expanding so check the “Schedule a Presentation” link on the organization’s website to see if there are volunteers in your area. For additional information, or if you’re a bankruptcy professional and you want to start a CARE program, contact Ninfo at firstname.lastname@example.org or call him at (585) 613-4200.
By Michelle Singletary