Finally, there is the last option: bankruptcy. This isn’t really a method of paying off debt at all. It is an entire restructuring of your financial

life.

It used to be a debtor could file for bankruptcy and, with the right filings, be cleared of all their debt. No more. Federal law changes made

the bankruptcy process much harder for the ordinary individual.

First, your credit record and ability to get any future financing will be damaged and virtually impossible for

about 10 years. You will generally have to live and function on a cash basis. This is much harder than it

sounds. Just securing a place to live will be difficult with a bad credit record if you don’t already own a house.

Second, bankruptcy is expensive. There are costs for filings, attorneys, court fees, and related expenses.

These have to be paid up front to complete a bankruptcy filing. The legal fees can add up to a couple

thousand dollars in total.

Third, the process is more stringent now. Recent federal law changes were put into effect after being lobbied

for heavily by banks and lenders for tighter bankruptcy rules.

The two potential categories for bankruptcy are Chapter 7 and Chapter 13. Chapter 7 is a complete wipeout

off all your outstanding debt. Certain expenses are exempted which include court ordered payments (child

support, alimony, legal judgments), government student loans protected from bankruptcy, loans obtained

through false filings, and loans not specified in the bankruptcy filings.

Even though Chapter 7 may seem like the way to go, there is a tremendous cost. Most filers lose everything

they own of value. The court wants to liquidate any remaining assets before cleaning your slate completely.

The demand and extent varies from state to state, but for the most part you will lose just about everything

worth some amount of money. That includes property, cars, jewelry, investments, collectibles, etc.

Chapter 13 is similar to what you hear in the news happening to companies. It involves a restructuring of your

financial picture. Since you clearly can’t manage your financial situation, the court will do it for you. However,

the court’s plan may not be the method you’re comfortable with. You get to keep your property but your

income falls under the direction of the court. The court will basically figure out a payment schedule of how

your income will be distributed between you and your lenders outstanding. The goal is to repay in total or part

of your debts within 3 to 5 years if possible. You get the protection from harassment from your lenders during

this time window, however. That can be blessing in itself since the restriction holds off collectors and

aggressive tactics. And interest on your loans due is no longer allowed to be added to your costs while in

bankruptcy. Assuming everything works as planned, you emerge without any more debt. But your credit

record is ruined at least for 7 years with the Chapter 13 bankruptcy on your file. If they have to choose

between the two, lenders prefer Chapter 13 since they at least get some kind of payment back.

Conclusion

Paying off debt is not easy. Anyone who has gone through the process, whether on their own or through a

court program will never say it’s a walk in the park. However, getting rid of debt has huge benefits to your

financial future and can mentally make life a lot easier, removing stress about payments and overdue bills.

The trick is to make sure you’ve used all the opportunities available to you.

That means controlling your spending, getting help, trying to earn more, asking family for assistance, being creative with your financing,

and ultimately negotiating with your lenders if you have to. It takes a long time to get to the worst case scenario of bankruptcy, and most

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When is zero the best number?

When paying off your debt!