Contemplating bankruptcy can be difficult. But identifying what type of debt you have can help clarify your decision. To start, put your debts into these categories to see how they would fit into a bankruptcy filing:
- Unsecured consumer debt: Credit card debt, cash advances and payday loans. You can settle this type of debt by filing Chapter 13 bankruptcy or eliminate it by filing Chapter 7 bankruptcy.
- Secured debt: Collateralized debt including your mortgage, home equity loan or line of credit, and vehicle loans must be reaffirmed through the bankruptcy court unless you're willing to forfeit your home and vehicles to foreclosure and repossession.
- Tax liens: These include federal and state income taxes and they are not eliminated through bankruptcy. Consult taxing agencies for repayment and possible settlement options.
- Education loans: Federal direct education loans and education loans issued by private lenders and guaranteed by the U.S. Department of Education. These debts are not discharged under bankruptcy proceedings.
Total the amount of your debts by category, and calculate the grand total.
Weighing the alternatives
Once you've figured out what types of debt you have and how much you owe, you should consider options other than bankruptcy for your situation:
- If you're unemployment/underemployment: Advise creditors of your circumstances, but don't promise to repay debt when you cannot do so. Seek help from a certified credit counselor for determining options based on your circumstances.
- If you're facing substantial health care costs: Negotiating cash settlements and repayment terms with health care providers reduces your debt and can avoid costly balances on your credit cards. Ask your providers to double-check their claims for coding errors.
- Declining home value: If you cannot refinance due to owing more on your home than it's currently worth, request a modification of your mortgage terms. Low mortgage rates can increase cash flow for paying other debts.
Contact a bankruptcy attorney if you are unable to resolve debt issues on your own. Consultations are free and can help with determining if bankruptcy is your best option.
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