Monday, July 30, 2012

To “B” or Not to “B”: Bankruptcy That is the Question

Bankruptcy is like putting a bandaid over a wound. The wound goes away but if you fall again and hurt yourself you will need another bandaid.  Over a million Americans file for bankruptcy every year.  To file for personal bankruptcy you must reside in a state for 90 days prior to filing and have total unsecured debt less than $290,525 or secured debt less than $871,550.  Americans who earn less than the median income in their state are entitled to file under Chapter 7.

Approval depends on your salary and the family size.  Income limits are based on the state you live in 
Those who earn more than the median income and have the ability to repay at least $6,000 over 5 years would have to file under Chapter 13, which requires a repayment plan. You must attend financial counseling 180 days before filing for bankruptcy.  

To file for bankruptcy you can do it yourself which will cost between $200 - $600 in court fees and filing fees or you can hire an attorney which will cost between $1,000 - $3,000.  You must provide proof that you are unable to pay your bills and proof that have sought additional help in the past.  You must provide documentation such as:  tax returns, paystubs, bank statements, mortgage statement or rental lease agreements, detailed list of monthly expenses including, a list of all debt including judgments and tax liens, amount owed, interest rates, canceled checks and credit card statements, retirement accounts, business income and debt, and child support.  

Once you file for bankruptcy you will receive a slew of credit cards offers in the mail because companies receive alerts on recent filings and want you to get in debt again so they can make money off of you.  If you file for bankruptcy it remains on your credit report for 7 to 10 years.    

Bankruptcy should be a last resort.  Sell any assets, sell new or unused items, adjust your tax withholdings for six months and then set back to your original withholdings.  You can rent out a room in your home or downsize or downgrade your car or home for a cheaper one.    

The alternative solution is to reduce your monthly expenses by 30-50%, create a budget, get a part-time job or go to back to school to increase your salary.   Here are 5 tips to consider before filing for bankruptcy:
  1. Do not make any large purchases before filing because this will decrease your chances of being approved.
  2. Don’t file Chapter 7 bankruptcy if your income exceeds your expenses.
  3. Don’t transfer credit card balances or make payments on any debt because this may decrease your chances of being approved.
  4. Don’t file your tax return if you expect to get a large refund because it will be assumed your refund can be used to pay down debt.
  5. Don’t apply for any loans or open any new credit accounts. 
Here are 8 ways to increase your credit score after your bankruptcy is discharged (approved):
  1. Open a secured credit card account.
  2. Open a department store credit card with a small limit of $300 - $500.  Purchase a small item each month for 6 months and pay the balance in full each month to establish a payment history.  
  3. Use a debit card or get a prepaid credit card to make purchases.
  4. Work with banks that have programs for people with bad credit such as BB&T, Bank of America, Household Bank, Wells Fargo.
  5. Open an online bank account.
  6. Open a checking with Account Now
  7. Use banks that don't use ChexSystems
  8. Open a bank account with a credit union. 

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